JD.com Stock May Be a Buy in Light of Trade War Uncertainty

Upcoming trade talks weigh heavily on the future of JD.com stock

JD.com (NASDAQ:JD) stock has rebounded throughout 2019. Shares are up from $20.31 on Jan. 2 to $28.85 at the close Oct. 7. But the U.S.-China trade war is keeping shares from climbing back to highs set in 2018.

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For most of 2018, JD stock traded well above $30 per share. While the success of JD.com is largely tied to the domestic Chinese economy, the trade war is top of mind. If the trade war accelerates, Chinese economic growth could cool, impacting the company’s growth story. In addition, recent talks of delisting Chinese stocks trading on the American exchanges hurt the price of shares.

But with trade talks resuming Oct. 10, the situation could improve. Bringing the trade war to a peaceful resolution could mitigate the effects of a Chinese economic slowdown. Add in the “hidden value” on JD’s balance sheet, and the stock may be a compelling opportunity.

Let’s take a closer look and see whether it is a buy today.

Future Moves of JD.com Depend on Trade Situation

A bet on JD stock is a bet on the Chinese economy. While Alibaba (NYSE:BABA) is regarded as the Amazon (NASDAQ:AMZN) of China, the company is no slouch itself in terms of e-commerce. In fact, the company is more similar to Amazon in that it sells merchandise like a traditional retailer. Alibaba is largely a marketplace between merchants and customers. As I wrote back in August, JD.com is a distant second in the Chinese e-commerce game. But it is catching up fast.

Partnering with companies such as Tencent (OTCMKTS:TCEHY) and Walmart (NYSE:WMT), JD.com is leveraging its market power. In addition, JD.com has invested heavily in developing its logistics infrastructure.

These growth investments have paid off. For the quarter ending June 30, sales grew 22.9% year-over-year. Operating income swung from a loss in Q2 2018 to $330.2 million in Q2 2019. Analysts estimate revenues could grow from $78.8 billion in 2019 to $92 billion in 2020.

But is this sustainable growth? As InvestorPlace’s Luke Lango discussed Sept. 26, Chinese e-commerce continues to be on fire. Industry-wide sales continue to grow at a 20% annual clip. This high growth is expected to continue over the next five years. However, if October’s trade talks fail to create a solution, China’s economic growth may face greater challenges.

With low operating margins and heavy investment, the company could lose big in an economic downturn. Given the stock’s valuation relative to Alibaba, there may not be sufficient margin of safety to make up for this risk. Let’s take a closer look at the valuation of JD.com stock.

JD Stock Trades at a Premium

Compared to Tencent and Alibaba, JD stock trades at a substantial premium. While all three stocks have similar forward price-to-earnings ratios, JD’s enterprise value/EBITDA ratio is materially higher. Here are the valuation metrics for all three stocks:

  • Alibaba: Forward P/E of 37, EV/EBITDA of 25.9
  • JD.com: Forward P/E of 37.2, EV/EBITDA of 37.6
  • Tencent: Forward P/E of 28.3, EV/EBITDA of 22.2

But there are caveats to this valuation. For one thing, the company continues to invest heavily into its operations. This impacts operating earnings. Once the company scales up, operating margins will improve. The stock could easily “grow into its valuation.” The stock also sells at a lower valuation than high-flying Chinese e-commerce company Pinduoduo (NASDAQ:PDD), which despite high negative operating margins has a $36.4 billion market cap. To put this in perspective, JD.com has a market cap of $41 billion.

JD.com also has a “hidden asset” on the books. Its healthcare business raised $1 billion in outside Series A funding. JD owns a majority of this unit, which is valued at $7 billion. JD.com could monetize even more of its business units. The company’s grocery unit (Dada-JD Daojia) may go public on the Nasdaq in 2020. In the coming years, this could be a big win for JD stock.

As a Growth Play, JD.com May Be a Buy

China’s continued economic growth hinges on a resolution to the trade war. But if the situation improves, stocks like JD.com could go up materially. Even though shares trade at a premium to peers such as Alibaba, the company may have runway to grow into its valuation.

Add in hidden assets that could be monetized, and the stock does not look so expensive. The biggest caveat is the risks of a Chinese economic slowdown. The company’s aggressive growth could backfire if e-commerce growth starts to slack.

In that case, what’s the call? If you are looking for a Chinese e-commerce play, JD stock may be a buy. But keep an eye on the macroeconomic situation and tread carefully before entering a position.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/10/jd-com-stock-jd-buy-trade-war/.

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