After a few days of panic, shares of JD.com (NASDAQ:JD) have roared back toward their pre-coronavirus highs.
Analysts focused on its growth and financial strength. When the Chinese e-retailer next reports results, investors expect sales of $23.5 billion and a small loss. A year ago sales were about $19.3 billion.
Few retailers outside Amazon (NASDAQ:AMZN) have anything like this kind of growth, which is why JD.com opened for trade Feb. 5 at $40.86. That’s a market capitalization of nearly $59 billion and a trailing price-to-earnings ratio of nearly 275. Analysts continue to support the stock even though it has blown past their one-year price targets.
Why Analysts Love JD.com
There are two reasons other than growth to like JD.com.
First, its logistical capabilities are second to none. The company continues to serve the hardest-hit areas of the coronavirus outbreak with extensive use of drones and robots.
Second, JD.com is taking advantage of its good press to strengthen its balance sheet. It is issuing $1 billion of notes backed by $4.3 billion in cash. JD may also do an IPO for its logistics unit, aiming at a valuation of $30 billion. The main company still holds over 80% of the logistics unit, notes InvestorPlace’s Faisal Humayun.
All this meant that when panic over the virus hit, InvestorPlace’s Tezcan Gecgil saw a buying opportunity. The company’s logistics business is growing at 75% per year and making 90% of orders the same day or the next day, she noted.
Mark Hake also told readers to buy the dip. The company is using its reputation to line up deals with big tech companies, including Microsoft (NASDAQ:MSFT) and HP (NYSE:HPQ).
This adds to equity infusions from Walmart (NYSE:WMT), which holds a 12% stake in the company, and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), which has invested $550 million. Its third big financial backer is Tencent Holdings (OTCMKTS:TCEHY).
The Bear Case
The problem now is that the dip’s over.
JD.com shares opened on Feb. 5 just $1 off their yearly high. They’re approaching the all-time highs of early 2018, when it traded near $50 per share before falling back.
The pullback began in Minnesota, where a student accused CEO and founder Richard Liu of rape while finishing his business doctorate. Liu denied it, charges were dropped and a civil suit was settled.
The uncertainty, however, sent the shares as low as $21. That’s where you could have gotten them near the end of 2018.
The stock’s volatility has caused some analysts to get out their calculators, estimating the company’s “intrinsic value” based on free cash flow. They come up with totals well below where the stock is currently trading. Yet many momentum analysts continue to pound the table for it.
The Bottom Line on JD Stock
JD.com is a very good company but the stock is getting pricey. Retailers should be worth 50%-75% of sales, and JD.com’s price is at the top of that range. The volatility of the stock also indicates that better buy points may be coming.
Such a point could come when the full extent of the coronavirus’ damage to China’s economy becomes clear. Traders are buying China right now because of early reports the virus has a 2% mortality rate and could be contained. But it may take months to see the full extent of the outbreak. Meanwhile, faith in the Chinese government and other institutions has been shaken.
The current price of JD stock, in short, suggests an all clear that has not been sounded. Another pullback may be coming.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.
