The bull thesis on Chinese e-commerce giant JD.com (NASDAQ:JD) heading into 2020 is strikingly simple. It goes something like this.
In 2018 , JD.com stock struggled. That’s because escalating U.S.-China trade tensions led to slowing Chinese economic activity, which weighed on JD’s profits. But that dynamic reversed course in 2019. Specifically, escalating U.S.-China trade tensions started to ease, and economic activity in China began to rebound, causing all aspects of JD’s financial results to bounce back.
Consequently, JD.com stock soared in 2019. In 2019, its shares are up more than 66%.
In 2020, this same, favorable dynamic will persist. U.S.-China trade tensions will continue to cool. Economic activity in China will continue to rebound. JD’s revenue growth rates will stabilize in the 20%-plus range, and its margins will keep ticking higher, while its profit growth will remain robust.
This favorable dynamic pushed JD.com stock materially higher in 2019. It will do the same in 2020. According to my estimates, JD stock can make a run towards $50 in 2020. That means JD can climb roughly 40% over the next 12 months, and that’s just too attractive to pass up on.
Why JD Should Perform Well in 2020
JD looks good heading into 2020 because its fundamentals should continue to improve over the next several months.
For all intents and purposes, the quality of JD’s results are dictated by the performance of the Chinese economy. In other words, because JD.com is the second-largest e-commerce platform in China and is used by many consumers in many parts of the nation, the growth rates of China’s economy largely determine JD.com’s revenue growth. For example, when China’s economy started to meaningfully slow in 2018, JD’s revenue growth rates sank from 40% to 20%. When China’s economy started to rebound in 2019, JD’s revenue growth improved from 20% to nearly 30%.
In 2020, China’s economy should continue to accelerate because U.S.-China trade tensions will ease further, since neither side wants to upset the egg carton heading into the American election.
Thus, in 2020 there will be a stalemate of global trade tensions. This stalemate will inject a level of global geopolitical and economic stability which was notably lacking in 2019. This injection of stability will cause corporate confidence levels to rebound. That, in turn, will lead to a similar rebound of global capital spending plans, especially those involving China. As a result, China’s entire economy will be boosted.
So in 2020, China’s economy will continue to rebound amid easing geopolitical tensions, and that rebound will cause JD.com’s revenue growth to stabilize in the mid-20% range. At the same time, its profit margins will continue to improve as it grows.
So in 2020, JD’s revenue growth will be high, while its margins will continue to rise. That dynamic pushed JD.com stock way higher in 2019. It will do the same in 2020 because the valuation of JD.com remains favorable.
JD Stock Will Make a Run Towards $50
The numbers at this point indicate that JD stock can make a run towards $50 in 2020.
According to numbers from eMarketer, China’s retail e-commerce market grew by over 27% in 2019 to nearly $2 trillion, and JD controlled about 17% of that market. Given that only 40% of China’s consumers are using e-commerce and that internet penetration rates in China remain well below the norms of developed nation, it is clear that China’s e-commerce sales will continue to grow 15%-20% annually for the next several years.
As a result, JD.com will maintain a 15%-20% revenue growth rate for a few reasons. First, the company has its own logistics network and is known for delivering things very quickly in China. Second, smaller e-commerce players should disappear as the market matures, providing more opportunities for the bigger names, including JD, to gain market share. Third, JD.com is expanding overseas, which should boost its top and bottom lines.
Meanwhile, JD.com’s earnings before interest, taxes, depreciation, and amortization (EBITDA) margins will come in at roughly 3% this year. That’s very low. The average operating profit margin among e-commerce companies is around 9%. Thus, as JD.com grows, the company has a huge opportunity to improve its profit margins.
JD’s revenue looks poised to rise 15%-20% over the next few years, with huge, positive margin drivers. I estimate that the company’s earnings per share will rise towards $3.30 by fiscal 2025. Based on an FY25 price-earnings multiple of 21-times forward earnings, which is average for the information technology sector, and a 10% annual discount rate, that equates to a 2020 price target for JD stock of nearly $50.
The Bottom Line on JD
JD stock surged 2019 because easing U.S.-China trade tensions sparked a rebound of China’s economy, which boosted JD’s growth. This dynamic will persist in 2020. As it does, JD.com stock will march towards $50.
As of this writing, Luke Lango was long JD.