Chinese e-retail giant JD.com (NASDAQ:JD) had a rough 2018. JD.com peaked in late January 2018 above $50. From that all-time high, JD plunged by about 60%. At the end of 2018, JD stock was trading hands around $20.
This year has been a completely different story for JD.com. In 2019, the shares are up more than 40% to $30, their highest level in over a year. The big question now is, can the red-hot rally of JD persist?
It can. There are three major reasons why it can. One, China’s economy is starting to stabilize, with consumers leading the way. Two, JD’s revenue growth outlook is similarly improving. Three, JD’s margins are moving meaningfully higher, and should continue to move significantly higher for the foreseeable future.
All three of those positive drivers are in the early stages and should persist for the next several quarters. They will ultimately drive JD significantly higher. Indeed, my estimates indicate that JD stock will head towards $40 soon.
Investors should stick with JD.com because its rally is not over, and it will climb much more.
3 Big Drivers Will Keep the Rally Alive
There are three major positive trends that will keep the red-hot rally of JD.com alive for the foreseeable future.
First, China’s economy is improving. The whole idea that the sky was falling on China’s economy was way overplayed. China is a very large country, with a rapidly expanding and urbanizing middle class. Additionally, its per capita income and consumer expenditure levels have room to climb, while its government is prepared to support the economy.
That’s a recipe for success. Indeed, according to a rigorous model put together by the Bank of Canada, China’s GDP growth is expected to remain north of 5% through 2030.
That’s rapid growth. In light of that favorable, non-cyclical growth backdrop, the current slowdown of China’s economy is just a near-term hiccup. It appears this hiccup is over.
Specifically, data from the OECD shows that China’s composite leading indicator – a measure of economic activity six to nine months into the future – has improved month-over-month for five straight months. Moreover, the last month for which data is available (July 2019), featured the biggest month-over-month increase in the past year and the smallest year-over-year decrease in the past year.
So China’s economy is bouncing back.
Second, as China’s economy has bounced back, JD’s revenue growth has improved. In the second quarter, JD’s revenue growth rate actually accelerated versus Q1, ending a multi-quarter streak of revenue growth deceleration.
JD goes as China’s economy goes, so as China’s economy has improved materially over the past five months, JD’s fundamentals have improved.
Third, and perhaps most importantly, JD’s margins are finally surging higher. JD.com has always been a low-margin player. In 2018, those margins took a huge step back amid high investments in logistics, AI, and e-commerce expansion. Those investments are now being reduced, causing its profit margins to jump.
JD.com Will Rush Towards $40 Soon
Taking a step back, JD stock is supported by three favorable growth drivers which should persist for the foreseeable future. One, China’s economy is bouncing back. Two, JD’s revenue growth rates are improving as China’s economy rebounds. Three, JD’s margins are rising as its investments decline.
How much higher will those three trends push JD stock?
A lot higher. Here are the numbers. China’s e-commerce sales are up 21% year-over-year so far in 2019, and eMarketer estimates that China’s e-commerce sales will jump 20%-plus over the next five years. JD is the second largest player in that market, with roughly 17% share, according to eMarketer’s estimate.
Additionally, JD has its own logistics network, and based on conversations I’ve had with Chinese consumers, I believe JD has quicker delivery times. Given those advantages, I think JD should be able to largely maintain its market share over the next several years.
Thus, JD’s revenue should grow 15%-20% over the next several years. During that time, its margins should improve as it grows and as its services business expands, emulating Amazon’s (NASDAQ:AMZN) history. By 2025, JD’s operating margins will probably reach 4%-plus, versus 2% today.
Assuming JD does sustain double-digit-percentage revenue growth and doubles its profit margins over the next several years, then JD’s profits could reach $3 per share by 2025. Multiplying that EPS by a forward price-earnings multiple of 20, which is average for growth stocks yields my 2024 price target for JD stock of $60. Discounted back by 10% per year puts my 2020 price target for JD stock at more than $40.
The Bottom Line on JD Stock
2018 was a rough year for JD.com, but 2019 has been a good one. The good times should keep rolling, mostly because the company’s underlying fundamentals continue to improve, while JD stock has room to rise meaningfully.
I’m sticking with JD stock because I don’t think its rally is over yet.
As of this writing, Luke Lango was long JD and AMZN.