Well before the novel coronavirus pandemic swept across the globe and accelerated worldwide e-commerce disruption, I was a huge fan of JD.com (NASDAQ:JD) stock because of the company’s tremendous upside potential in China’s still nascent but rapidly expanding online retail market. See here, here, here and here.
Covid-19 only boosted that bull thesis. And as it has, JD stock has taken off like a rocket ship. Year-to-date, JD stock is up 70%. Over the past year, it’s up 125%. And since the start of 2019, it’s up about 190%.
Time and time again, I’ve said stick with the big rally in JD stock, both because the company’s growth trajectory was improving and because the valuation remained tenable.
But now – for the first time in two years – I’m easing on my bullish stance on JD stock. For two big reasons.
First, JD stock is finally fully valued. According to my long-term model on the e-commerce company, $60 is a fair price tag for JD stock today.
Second, that full valuation will be challenged by moderating Covid-19 tailwinds and slowing growth in the back-half of 2020.
All in all, I think it’s time to pump the brakes on red-hot JD stock. This rally looks maxed out.
A Long-Term Winner
Do not mistake my temporary easing of bullishness as a lack of conviction in JD.com. This company is still a long-term winner.
JD is the heart of China’s booming e-commerce market. The company has created a platform which is essentially the Amazon (NASDAQ:AMZN) of China, with hyper-fast delivery times thanks to its owned and optimized logistics network.
That market will continue to grow over the next several years, thanks to population growth, expanding internet penetration rates, urbanization and income gains. eMarketer sees China’s e-commerce sales rising by nearly 120% into 2023. I think that number could be much bigger, and maybe closer to 150%.
As the Amazon of that booming market, JD will also see its revenues rise 100%+ into 2023. Plus, thanks to economies of scale, improved productivity in its logistics business and higher average order values, JD’s profit margins are already meaningfully expanding, and will continue to do so for the foreseeable future.
Is there 100%+ revenue growth plus big margin expansion? You’re talking about huge profit growth potential here. So long as the company stays on that winning trajectory, JD stock will head higher in the long run.
Two Big Near-Term Risks
In the near term, however, further upside in JD stock will be limited by two factors.
First, there’s the valuation. At $60, JD stock is fully valued for robust growth over the next few years.
Assuming 10%+ revenue growth into 2025 alongside steady profit margin expansion, my model calls for $4.35 in earnings per share by 2025. Based on a 20-times forward earnings multiple – which is historically normal for consumer discretionary stocks – and a 10% annual discount rate, that equates to a 2020 price target for JD stock of just under $60.
Second, there’s the optics. In the back half of 2020, JD’s growth trajectory will likely decelerate, not accelerate.
That is, JD’s revenue growth rates are presently accelerating because of Covid-19. Second-quarter revenues are expected to rise 25%, versus 21% growth in the first quarter. Covid-19 tailwinds will moderate in the back half of 2020. As they do, revenue growth rates will likely come in below 25% in the third and fourth quarters.
The coupling of a full valuation and decelerating growth will likely short-circuit this epic rally in JD stock. At the very least, these risks imply that the best of this rally is over.
Bottom Line on JD Stock
Long term, I love JD stock.
But here and now, the stock is maxed out. The best of the rally has already happened. It’s time to do some profit-taking, to give yourself dry powder to buy the dip the next time the stock sells off.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long JD and AMZN.
