Following President Donald Trump’s recent declaration that he may wait to finalize a U.S.-China trade deal, stock markets are off to a volatile start in December. As investors wonder whether China-based stocks might be adversely affected by the president’s statement for the rest of the month, this column will analyze the short- and long-term outlook of JD.com (NASDAQ:JD) stock, China’s largest e-commerce company by revenue.
In 2019, JD stock is up about 57%. Needless to say, JD.com has been hot this year, but in the short-run, the share price could drop due to profit-taking.
JD.com’s Q3 Earnings
On Nov. 15, JD.com released strong Q3 results, beating expectations from top to bottom. Its net revenue rose 29% year-over-year to $18.9 billion. Its earnings per share was 29 cents, versus analysts’ average estimate of 17 cents.
Its income from operations was $695.8 million, compared to a loss from operations a year ago.
JD.com’s YoY user growth accelerated last quarter, while its mobile user count surged 36% YoY.
Its monthly active mobile users increased 36% YoY in September. The owners of JD stock cheered the results. JD.com has a robust business model and is poised to benefit from the expanding Chinese e-commerce market. The company has about a 25% share of the nation’s online retail market.
JD.com also has hundreds of warehouses and thousands of delivery stations as well as fresh food stores across China. JD Logistics’ revenue grew over 75% YoY in Q3. JD.com claims that approximately 90% of the unit’s orders are delivered the same day or the next day.
JD.com’s E-commerce Strength Will Propel JD Stock Higher
In addition to being one of China’s most valuable enterprises, JD.com is a member of the Fortune Global 500.
Online shopping represents about 35% of China’s $5.5 trillion retail market. By comparison, e-commerce in the U.S. represents about 11% of the nation’s total retail sales.
According to recent research by the China Center for Economic Research, “the most popular products sold online at JD are cell phones, followed by food and beverages, makeup and cosmetics, digital products, and lifestyle and travel goods.”
Mobile device users are still a driving force of consumer spending. China has the most mobile users in the world. And the mobile market is expected to grow further as China’s cellular infrastructure improves.
Although China’s economy may slow further in 2020, China’s GDP is still expanding at an average annual rate of at least 6%. Over the longer term, China is likely to overtake the U.S. as the world’s number one economy.
China’s unemployment rate dropped to an all-time low of 3.6% in 2019. And average wage increases have been high enough to improve consumer sentiment. In other words, the country’s growing middle class will continue to drive increases in consumer spending and the expansion of China’s e-commerce market.
And when Chinese citizens have more money in their pockets, they can spend more on online shopping sites like JD.com, which has already become an internet juggernaut.
Short-Term Headwinds for JD.com
Although it is hard to quantify the exact effect of continued trade wars on JD.com, the uncertainty they create will likely make JD stock more volatile in the short-run.
As the economy cools off, the owners of JD.com stock will also pay more attention to JD’s competitors. JD’s main competitor is Alibaba (NYSE:BABA), whose Tmall and Taobao platforms are China’s largest online business-to-consumer and consumer-to-consumer marketplaces, respectively.
In the past few years, new players have entered the internet commerce marketplace in China. One example is Pinduoduo (NASDAQ:PDD), a Groupon (NASDAQ:GRPN)-style retailer, which launched its IPO in 2018.
One of the main criticisms of JD.com by analysts over the years has been JD stock’s low margins. For example, throughout 2018, JD’s revenue growth slowed and its operating margins dropped. If the Chinese economy slows further, JD’s growth metrics could also slow. Additionally, more companies are likely to enter the lucrative, growing Chinese e-commerce sector.
Finally, political instability in Hong Kong could also negatively affect JD.com.
Analyzing the Movements of JD Stock
JD stock has been volatile over the years. It shot up from $20 in 2014 to $50 in early 2018. Then things went downhill. In Nov. 2018, JD.com hit $19.21.
Throughout 2019, the shares have recovered as the company’s quarterly profits and revenue growth have improved.
On Nov. 15, 2019, JD.com stock hit a 52-week high of $35.43. Currently, the stock is hovering around $33.
Because of the impressive jump of JD.com over the last year, its technical indicators have become somewhat over-extended.
But if you already own JD stock, you might want to stay the course and hold onto your position. Or you may also consider opening a covered call position in conjunction with buying JD stock.
If you do not currently own shares of JD.com, there will likely be opportunities to pick up the stock more cheaply.
However, if the U.S. and China reach a trade deal soon, JD.com, along with many Chinese stocks, are likely to rally.
The Bottom Line on JD.com Stock
Although JD stock has been a strong performer in 2019, its price is still considerably lower than its all-time highs of January 2018.
Since JD.com stock is a growth name, it trades on forward sales as well as the momentum provided by future expectations. The markets are likely to continue to be choppy in the next few weeks, especially since investors may decide to take profits as the year ends.
The volatility of JD stock is high, giving it a broad trading range, so short-term traders should be cautious about buying the shares in coming weeks.
However, long-term investors shouldn’t scramble for the exits just yet. JD stock and many of the other Chinese companies listed on U.S. exchanges enable investors to benefit from the growing spending of Chinese consumers.
Because of the hugeness of the Chinese market, many Chinese e-commerce companies can thrive. And there are plenty of long-term catalysts that could drive JD.com higher in the years ahead.
As of this writing, the author did not hold a position in any of the aforementioned securities.