As our readers are no doubt aware, the Wuhan coronavirus has increased the volatility in broader stock indexes, but particularly so in China-based stocks. That’s why I’m taking a look at the prospects for JD.com (NASDAQ:JD) stock, which is up about 12% YTD. However, JD stock still remains off its 52-week high of $42, seen on Jan. 22.
We certainly all hope that the severity and the human cost of the viral outbreak will not be high. However, in the short-run, broader markets will likely price in a decline in Chinese economic activity, which in turn could adversely affect the prices of most Chinese stocks, including JD. Therefore, I’m not yet willing to put any new money into this stock prior to its Q4 earnings expected in late February.
However, in the long-run, I still regard JD stock as a good buy. JD.com is China’s largest online retailer and its biggest overall retailer, as well as the country’s biggest internet company by revenue. That’s gotta be worth something.
What to Expect from Earnings
On Nov. 15, the company released strong Q3 results, beating expectations from top to bottom. Net revenue rose 29% year-over-year to $18.9 billion. Earnings per share was 29 cents, versus analysts’ average estimate of 17 cents.
The first three quarters of 2019 saw JD’s revenue growth stabilize and profits improve. Income from operations was $695.8 million, compared to a loss from operations a year ago.
Therefore, in the upcoming Q4 numbers, analysts would like to see a continuation of this trend. However, because of the coronavirus, Chinese New Year celebrations were curtailed, leading to a possible decrease in consumer spending.
The group takes on inventories and fulfills orders with its own logistics network. It also has hundreds of warehouses and thousands of delivery stations as well as fresh food stores across China. JD Logistics’ revenue grew more than 75% YoY in Q3. Management claims that approximately 90% of the unit’s orders are delivered the same day or the next day.
However, due to this viral epidemic, JD.com may also be at risk of a slowdown in regional sales. Several towns have shut down. There are travel bans in effect, and work and school holidays have been extended. In fact, Yum China Holdings’ (NYSE:YUMC) KFC and Pizza Hut units launched a contactless delivery service in China last Thursday, in an attempt to reduce the risk of person-to-person transmission of the deadly coronavirus.
So the Street will scrutinize various metrics not only in Q4 but also later in Q1 earnings to analyze the full impact of these developments.
Earlier in Q3, in terms of outlook for the fourth quarter, management had said that it expected a strong growth of between 21% and 25%. Investors will be anxious to know if these numbers can be met.
E-commerce Strength Will Propel JD Stock Higher
The long-term bull thesis on Chinese stocks in this new decade is rather simple. Several catalysts such as the rise of middle class, growth in consumption, and mobile user penetration will impact companies in China. One segment that is continued to benefit is online shopping, which represents about 35% of China’s $5.5 trillion retail market. By comparison, e-commerce in the U.S. makes up about 11% of our total retail sales.
JD.com has a robust business model and is poised to benefit from the expanding Chinese e-commerce market. In addition to its own e-commerce business, it also offers its platform to other online sellers. The company has about a 25% share of the nation’s online retail market. Its new discount marketplace, Jingxi, has recently posted robust growth, too. Management has also diversified into other business areas such as logistics, financing, fintech, and offline retailing.
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. And when Chinese citizens have more money in their pockets, they can spend more on online shopping sites like JD.com.
I’d like to highlight that JD stock’s price to sales ratio is 0.75x. This number puts the company on my radar now and for the future. Analysts prefer a low P/S multiple, ideally below 1x. However, a P/S number between 1x and 2x is more common. To put the metric into perspective, the S&P 500 index’s average price-sales ratio is 2.3x.
Short-Term Headwinds
The current viral outbreak is likely to affect both consumer and business activity during the first quarter of 2020. Although it is hard to quantify the exact effect on JD stock, the uncertainty will likely make the share price more volatile in the short-run.
Both supply and distribution chains in the country may be disrupted in the short-run. The company carries inventory and sells directly to consumers. Therefore, we can expect JD stock’s future earnings to reflect various developments from the epidemic.
China’s economy has already been slowing down even before the news of the virus broke out. As the economy cools off, competitive forces in e-commerce will become even more important.
Currently the company’s main competitor is Alibaba (NYSE:BABA). Its 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. Examples include the online discount retailer Vipshop (NYSE:VIPS) as well as Pinduoduo (NASDAQ:PDD), a Groupon (NASDAQ:GRPN)-style retailer.
One of the main criticisms of JD.com by analysts over the years has been the group’s low margins. If the Chinese economy slows further, its growth metrics could also slow. Additionally, more companies are likely to enter the lucrative, growing Chinese e-commerce sector.
Since JD.com stock is a growth name, it trades on the momentum provided by future expectations. The stock trades at over 25 times forward earnings. Although it is not an extremely high number, given the question marks regarding China at this point, I’d be more comfortable with a number below 20. In comparison, the forward P/E ratio for BABA and Amazon (NASDAQ:AMZN) stocks are 23x and 70x respectively. Therefore any negative news about the Chinese economy could likely cause growth stocks to decline further.
So Should You Buy JD Stock Now?
How will the most-recent viral outbreak and its aftershocks all pan out? Quite hard to know. However, if history is any guide, in a few months it will be remembered as only a small road bump.
Therefore if your portfolio is exposed to China-based companies or others that may rely on China for much of their sales, you may want to be careful, but also avoid panic selling. We are also living at an age when “misinformation” can spread rather fast. So it is possibly best to keep calm.
Although JD stock has been a strong performer in 2019, its price is still considerably lower than its all-time high of $50.68, seen in January 2018. It currently hovers around $40.
If you are an investor who also pays attention to short-term technical charts and indicators, then you may want to exercise caution. There will likely be further volatility with a downward bias in the share price. I believe the shares may go down below $35, and possibly toward $30. If you do not currently own shares of JD.com, there will likely be opportunities to pick up the stock more cheaply.
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 the stock. Such a hedge would offer some protection in case of a further decline in the share price.
When we remember that JD’s e-commerce business weathered the U.S.-China trade headwinds in 2019, it would not be wrong to assume that it can continue to grow strongly in the future, too.
As of this writing, the author did not hold a position in any of the aforementioned securities.
