InvestorPlace contributor Ian Bezek hit the nail on the head in his Nov. 19 column when he suggested JD.com (NASDAQ:JD) was worth buying after its monster earnings beat.
Despite JD’s blowout third quarter, JD.com has lost almost 10% of its value since announcing its results. I guess that’s why they say, “Buy on the rumor, sell on the news!”
In early September, I suggested that JD.com was a $50 stock disguised as a $30 stock. Looking at a few key points from its Q3 results, I believe it could hit $50 as soon as next December.
Of course, as I said in September, that won’t happen without a permanent, all-encompassing trade deal between the U.S. and China. Until then, as Bezek, the other InvestorPlace contributor, argued, investors can buy JD shares at a serious discount.
Take advantage of investors’ uncertainty while you still can.
Free Cash Flow Positive
Bezek pointed out that JD.com’s financial results continue to strengthen.
Its free cash flow, one of my favorite financial metrics, was $8.8 million in Q3, up almost 108% from a year ago. The company will finish the year with nice top-line growth, bottom-line profits, and free cash flow up the wazoo. In a lot of respects, JD is starting to experience a trajectory not dissimilar from that of Amazon (NASDAQ:AMZN).
That’s a very good thing. Now back to the FCF situation.
From September 2018 to September 2019, JD.com had FCF of $2.2 billion, considerably higher than the negative FCF of $774.7 million that it had in the previous 12 months and the $1.0 billion of FCF it reported between June 2018 and June 2019. Both sequentially and year-over-year, JD is becoming far more profitable.
What will its full-year 2019 FCF be? If I had to hazard a guess, I’d go with $3.4 billion.
If that’s the case, its FCF yield would be 8.1%, based on an enterprise value of $42.0 billion.
From where I sit, that puts it in value territory.
JD has enough free cash flow to eliminate all of its debt. That provides it with considerable financial flexibility.
JD’s Customer Base Continues to Grow
From the end of Q3 of 2018 to the end of Q3 of 2019, the number of JD’s active customer accounts increased 4.1% to 334.4 million.
Through the first nine months of fiscal 2019, JD’s retail unit had $55.9 million of sales. Annualized over 12 months, that’s $74.5 billion or $222.79 per active customer account. In the first nine months of 2018, on an annualized basis, that’s $59.2 billion or $184.40 per active customer.
This means that not only did JD.com increase the number of active customer accounts by an average of 4% each quarter, but the amount they spent rose by an average of 21% per quarter.
With its retail business solidly profitable, it can afford to take chances on its new businesses, which currently aren’t profitable, but should be by the end of fiscal 2020.
The Bottom Line on JD Stock
From every angle, JD.com has become one of the most successful retailers in China.
Back in 2018, I had lost confidence in JD.com and its CEO and founder Richard Li because of allegations that Liu raped a woman while he was traveling on business in the U.S. Since Hennepin County Attorney Mike Freeman decided not to charge the executive in December 2018, JD.com has risen by 50%.
By the end of 2020, I expect it to jump by another 50%, bringing it close to $50.
JD.com is one of the best $30 stocks currently available.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
