Analysts are debating whether the volatility and general market weakness in the markets will continue in September. Today, I would like to discuss the prospects of JD.com (NASDAQ:JD), China’s largest eCommerce company by revenue. Year-to-date, JD stock is up over 45%.
In other words, despite the trade war, Chinese consumers are spending money. Currently, the JD.com share price is hovering at around $30. I believe this level will continue to act as resistance in the coming weeks. Let us take a look at how the rest of the year may shape up for JD stock.
How JD.com Stock Makes Money
JD.com, a member of the Fortune Global 500, offers investors the possibility to invest in the growing Chinese consumer economy. Online shopping represents about 35% of China’s total $5.5 trillion retail market, and JD.com has a 25% share of the online retail market.
The group also has hundreds of warehouses and thousands of delivery stations as well as fresh food stores across China. JD takes on inventories and handles logistics as a direct retailer. This approach requires more capital and higher costs. However, it also enables JD.com to have more control over the customer experience than its rivals, including Alibaba (NYSE:BABA) and Pinduoduo (NASDAQ:PDD).
In August 2018, JD.com and Walmart (NYSE:WMT) jointly invested $500 million into Dada-JD Daojia, an online-to-offline grocery business which is part-owned by JD.com. In other words, the group is aiming to differentiate itself from the competition by investing heavily in its logistics business.
Moreover, JD also makes money from third-party sales of other merchants that use JD’s massive warehouse and logistics operations.
On Aug. 13, JD.com reported Q2 earnings and showed healthy growth. Its non-GAAP quarterly earnings came in at 0.36 Chinese yuan, or 5 cents per U.S.-listed share. JD.com stock’s net revenues increased by 23% to hit 150.28 billion Chinese yuan, or $21.28 billion.
Management highlighted the fact the eCommerce platform saw rising demand for big-ticket items, such as electronics and home appliances.
In the last quarter, JD.com’s number of annual active customers, i.e., those who made a purchase over the past year, grew 2% to reach 321 million. Investors also noted that Prada, the leading Italian fashion house, agreed to open first-party flagship stores on JD.com.
Although management did not provide any bottom-line guidance for Q3, JD.com expects revenue to increase by 20%-24% annually in the third quarter.
JD.com Faces Competition in China
JD.com faces increasing competition from other Chinese companies. Its main rival is Alibaba, whose Tmall and Taobao platforms are China’s largest online business-to-consumer and consumer-to-consumer marketplace, respectively.
When BABA stock announces its quarterly results, there is always a corresponding big move in the price of JD.com stock, too. As of the end of Q1, Alibaba has over 727 million monthly active users (MAUs) and is in the lead in China.
Pinduoduo is also increasing its marketshare in the country. It a young eCommerce platform that focuses on group buying. PDD stock has recently reported strong Q2 results and the stock has seen new highs as a result. At the end of Q1, its MAU numbers were almost 300 million. Many analysts now believe that Pinduoduo, the underdog, is on the road to catch up to both JD.com and Alibaba.
JD stock is a growth name that trades on forward sales as well as the momentum provided by future expectations. In the past few months, China’s industrial and manufacturing sectors have contracted. Yet analysts are hoping that consumer spending will continue to hold up well. Therefore the uncertainty regarding the Chinese economy may continue to affect investor sentiment in the short-run.
On a final note, I am a bit concerned about JD.com stock’s quick ratio of 0.91. This ratio demonstrates the ability of the company to cover short-term liquidity needs.
In other words, the group may be in a somewhat difficult position to weather any serious headwinds due to an economic slump in the short-term. As a comparison, Alibaba stock’s current ratio stands at 1.38.
Long-Term Catalysts for JD.com Stock
In June 2018, Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google announced that it would invest $550 million in JD.com. Both companies stated that the combined synergies would enable them to collaborate on various eCommerce and technology-related areas.
Under the agreements, Google received “27,106,948 newly issued JD.com Class A ordinary shares” at a price that equated to “$40.58 per American depository share.” This cooperation between the two companies is likely to benefit both of them in the years to come. Yet so far, JD stock price hasn’t shown any benefit.
Although the Chinese economy may slow further in 2019 or 2020, China’s GDP is still expanding at an average annual rate of at least 6%. Recessions hurt consumers in general, but they don’t outright kill consumption. China’s growing middle class will continue to drive increases in the country’s consumer spending and the expansion of China’s eCommerce market. When Chinese citizens have more disposable income, they can spend more money on online shopping sites like JD.com.
China’s economic fundamentals have vastly improved over the past decade. The internet population is still booming. And money continues to pour into Chinese companies operating in this space. These factors are likely to help support the long-term durability of JD stock.
On Aug. 12, JD share price closed at $27.16. On Aug. 19, the stock hit a recent high price of $32.28. In other words, Wall Street was clearly pleased with the recent earnings results. Investors now seem more confident that in quarters to come, JD.com will continue to grow its revenues and the bottom line.
So Should Investors Buy JD Stock in September?
JD stock and many of the other Chinese companies listed on U.S. exchanges enable investors to benefit from growing Chinese consumer spending. However, the next several weeks may bring more volatility in JD shares. And I do not expect to witness a major favorable sentiment shift toward Chinese stocks.
In the next few weeks, trading in JD stock is likely to be choppy with both widely up and down days. JD.com shares are likely to trade between $25 and $30.
Short-term investors should be ready for daily price swings in these Chinese stocks such as JD. Long-term investors may see any further price declines as opportunities to go long.
I think JD.com is still one of the best stocks China has to offer, and it could easily find a place in investors’ portfolios if they’re in it for the long haul. Within a few years, I expect JD stock to easily reach the lower $40’s level, or the price Google paid for the shares in 2018.
As of this writing, the author did not own shares in any of the companies mentioned.