Given the hysterical headlines about the coronavirus from China, you might expect that Chinese stocks are getting pummeled. That’s widely the case, but many are not. Take JD.com (NASDAQ:JD) for instance. JD stock is down a little less than 10% since their recent 52-week high. Given all the dour news and dreadful stock market trading of late, one might wonder why JD stock isn’t down more.
One explanation is that JD was on a huge winning streak right until the coronavirus started to hit. The company went through a couple of lean years in 2018 and the early part of 2019, as revenue growth dipped, the CEO was arrested on suspicion of rape, and the company’s profit margins wavered. Investors were understandably nervous. In the second half of 2019, however, the company totally turned things around. Combine that with the first stage trade deal agreement between the U.S. and China, and JD appeared all set for a blockbuster 2020.
Strong Earnings & Value Unlocking
JD’s last earnings report was a strong one, with both revenues and earnings coming in way ahead of expectations. Subsequently, the company posted strong holiday sales. This brought in analyst upgrades, such as from Barclay’s, citing accelerated profit margins and strong Singles Day sales as a reason to get bullish on JD.
Another factor in JD’s favor is that the company is starting to realize the value in its other business units beyond the core e-commerce segment. It already divested JD Finance while retaining a substantial profit share and potential equity stake. It is making plans for a gigantic JD Logistics IPO outside of China, perhaps in Hong Kong or New York. And the company’s fast-developing JD Health division could also fetch a solid asking price in coming months or years.
Make No Mistake: Coronavirus Is Bad For Business
We’re hearing a narrative out there that the coronavirus will, counter-intuitively, actually be good for e-commerce leaders like Alibaba (NYSE:BABA) and JD. It’s not a totally crazy proposition on its face either. Given that as many as 700 million Chinese people are under quarantine, folks won’t want to go out shopping. And in many cases, brick and mortar stores themselves will be closed for the time being. So, that should naturally lead to a big pop in online sales, right?
Not necessarily. The e-commerce industry has a reputation for being fairly recession-resistant. This, however, is largely based out off of the Great Financial Crisis, when online commerce was still a far smaller portion of the overall sales environment. E-commerce is now large enough, both in China and in the U.S., that it is likely to feel a similar impact as brick and mortar when the economy turns down. While a virus is somewhat less harmful to online retail versus physical, that dynamic won’t outweigh a broad economic slowdown.
JD Isn’t Just Retail
It’s also important to consider that JD is more than just its core retail business. You have its broad logistics network for example, which is a great source of value. It seems probable that JD will do a partial spin-off or sale of logistics to raise capital and generate shareholder value. The value of logistics networks, logically, tends to fall sharply during recessions though.
You have JD’s finance business. There’s a whole lot of stuff under the umbrella there, including consumer finance, securities, supply chain financing, insurance, and the like. The value of elements of this business could drop sharply in a recession.
Also, don’t forget that JD has an investment arm that puts money into a lot of other businesses, both private and publicly-listed. JD’s investment in luxury retailer Farfetch (NYSE:FTCH), for example, has gone poorly in general, and it’s veering from bad to worse now: Farfetch stock is down 20% just over the last week alone.
JD Stock Conclusion
There’s certainly something there with the idea that the virus will change consumption habits. And it’s certainly better to be an e-commerce business than a physical retailer during a global health scare. That said, if China goes into a recession, consumers will pull back spending across all distribution channels. People that are out of work simply aren’t making huge discretionary spends, whether in-store or online.
If you want to play a coronavirus effect-type stock, social media platforms or streaming sites seem to make more sense. Something like Facebook (NASDAQ:FB) in the U.S., or video streamers like IQIYI (NASDAQ:IQ) in China. People stuck at home will certainly use their time on something, but it might not be shopping.
Over the long haul, I remain a firm JD stock bull. I haven’t sold any of my holding in the company despite both the trade war and now the coronavirus. That said, it’s rather strange that JD stock is down less than 10% from its highs given the recent developments. This is a good time to hold, but wait for a steeper pullback to buy JD stock.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, Ian Bezek owned JD and FB stocks.