The last two years have been polar opposites for Chinese e-commerce juggernaut JD.com (NYSE:JD) and JD stock.
In 2018, amid escalating U.S.-China trade tensions, China’s economy slowed dramatically. As it did, so did JD.com. The company’s revenue growth rates dropped, its margins were killed and its profits were wiped out. So was JD stock, which lost half of its value in 2018.
In 2019, everything changed. U.S.-China trade tensions cooled. China’s economy stabilized. JD’s revenue growth rates stopped falling and started rising. The company’s margins noticeably improved and its profit growth surged. And, importantly, JD stock has rallied an impressive 60% in 2019.
In other words, while 2018 was awful for JD,com, 2019 has been great. The red-hot 2019 rally of JD should continue in 2020.
In 2020, three things will happen. One, China’s economy will continue to bounce-back. Two, JD’s revenue growth rates will stabilize in the 20%-plus range. Three, JD’s margins will continue to tick higher.
Those three things will ultimately lay the groundwork for JD.com to keep rallying in 2020. How much higher can the stock go? My numbers suggest that this stock will take out $40 next year, so I see shares rallying another 20% over the next 12-plus months.
3 Catalysts Will Support JD.com in 2020
In 2020, three main catalysts will support further gains by JD stock.
- China’s economy will bounce back. China’s economy has slowed over the past two years because of escalating U.S.-China trade tensions. But those trade tensions have eased tremendously over the past few months, and as they have, China’s economy has bounced back. This rebound will persist into 2020, mostly because President Donald Trump won’t up the trade ante ahead of his re-election campaign, so trade conflicts will remain relatively muted for the next 12 months.
- JD’s revenue growth rates will stabilize. As China’s economy rebounds in 2020, consumer spending trends throughout China will stabilize and improve. As a result, JD’s revenue growth rates will stabilize and improve.
In 2019, e-commerce revenue is up about 20% year-over-year in China. JD’s revenues are also up about 20% YoY. - JD’s margins will move higher. In 2018, JD invested a great deal in logistics, infrastructure, and business expansion. Those investments weighed on its margins. But in 2019, those investments have largely ended. As a result, the company’s margins have rebounded. They will continue to rebound in 2020 as sustained high revenue growth increases the company’s profitability.
So in 2020, JD.com will be supported by a rebounding Chinese economy, sustained strong revenue growth trends, and improving margin trends.
JD Stock Will Take Out $40
Also in 2020, JD stock looks poised to take out the $40 level, so JD.com can climb about 20% over the next 12 months.
There are two main reasons why I think that JD can reach $40 in 2020. First, JD is a sizable, irreplaceable player in China’s e-commerce market. Moreover, the fact that it has its own delivery network has enabled it to create the fastest, most reliable logistics system in China.
Second, China’s e-commerce market will grow rapidly, partly because only 60% of its citizens are connected to the internet, versus internet penetration rates of 90% and higher in other developed economies.
China’s e-commerce sales are up 20% YoY so far in 2019. eMarketer thinks they will jump 20%-plus over each of the next five years. JD is the second-largest player in that market, with a roughly 17% share of the retail e-commerce market. If JD’s logistical advantages enable it to largely maintain its current market share, JD’s revenues should climb 15%-20% over the next several years.
Meanwhile,its margins should keep improving as it grows and offers more services. That should turn its 15%-20% revenue growth into 20%-plus profit growth. As a result, JD.Com’s profits could reach $3 per share by 2025. Assuming JD.com stock has a forward price-earnings multiple of 20 at that point — which is average for growth stocks — then a realistic 2024 price target for JD is $60.
Discounted back by 10% per year, that equates to a 2020 price target for JD.com stock of about $40.
The Bottom Line on JD.com
Easing U.S.-China trade tensions, rebounding China economic activity, and improving revenue and margin trends will all keep JD.com on a winning path in 2020.
How far can JD stock go before it’s gone too far? I think $40 is the number to watch. Ride this stock up to that level, but if it crosses there too soon (before the end of next year), it may be time to take profits.
As of this writing, Luke Lango was long JD.
