JD Remains a Solid Investment Despite Corporate ‘Shakeup’

JD.com (NASDAQ:JD) stock is my best investment of the year.

Continued Downward Pressure Makes JD Stock a Buy Right Now
Source: testing / Shutterstock.com

I bought shares at $47 in May. Now they’re trading at $78, a gain of nearly 66%.

The Chinese e-commerce company’s ability to get through the pandemic, combined with new digital efforts, have made it a hot stock. Analysts are pounding the table for its digital potential  in fintech and health care.

The result is a stock that, at first blush, looks fully valued. JD has a market cap of $121 billion. The company reports results using the Hong Kong dollar, trading at $7.75 to the U.S. currency. So last year’s sales come to $86 billion, those for the first half of 2020 $50 billion.

This is a retailer selling for more than its revenue. Why?

Amazon and Alibaba

The reason is that JD’s operations combine elements of two popular stocks, Amazon (NASDAQ:AMZN) and Alibaba Group Holding (NASDAQ:BABA), both of which I also own.

Like Amazon, JD is mostly a logistics company. Its ability to serve remote villages is legendary in China. Its use of technology for delivery, including drones, is market defining.

Like Alibaba, JD also has big cloud ambitions. Its partner is Baidu (NASDAQ:BIDU), the search company with a network of cloud data centers. That network is being extended to 150 Chinese data centers through a deal with Cloudflare (NYSE:NET) in the U.S. The idea is to beat Alibaba in the cloud just as it did in delivery, with a deep network of local operations.

These will be powered by Neuhub , an artificial intelligence platform launched in 2018. The aim is to process language, computer vision, and machine learning in retail and supply chains. 

Now Liu Qiangdong

Founder Liu Qiangdong was better known a few years ago under his anglicized name, Richard Liu. This has nearly disappeared since his 2018 arrest in Minnesota on rape charges. At the time he was completing a doctorate in business at the University of Minnesota.

The charges were dropped, the victim taking a cash payment and apology. Liu resigned his positions as legal representative, executive director and general manager in favor of other JD executives, but he retains 79% of JD share voting rights as well as control of the company.

Liu’s story illustrates the shifting relationship between the U.S. and China. Both sides are becoming more nationalistic, yet both seek to maintain a moral high ground.

Big Spin-Off

Another way Chinese companies like JD are separating from American ones is in structure. Subsidiaries are regularly spun off into new public companies, the parents maintaining control. The new units have plenty of capital for their ambitions, while centralized control is maintained over China’s growth.

This is the game JD is now playing with its digital assets.

To start, it is spinning out its health care unit in Hong Kong to raise $3 billion. 

It is also working getting a second payment license to compete directly with Alibaba and Tencent Group Holding’s (OTCMKTS:TCEHY) WeChat Pay.

JD is working with the government to introduce a “digital yuan”  that can be used online as well as offline. This can replace cash and reduce transaction costs. The resulting company is JD Digits, which will also do livestreaming and could be spun off with another $3 billion IPO. 

The Bottom Line

While many U.S. analysts are jumping on board JD stock, despite its recent gains, there remain skeptics. Elliott Wave theorists insist its recent rise wasn’t based on fundamentals, but on traders blindsided by news that was already in the shares.

Earlier excitement over JD stock was sparked by Richard Liu’s American education. Now it’s Liu Qiangdong’s government connections driving the stock. Smart investors will realize they’re the same dude. Your bet on JD is the same as it ever was, that this Golden Gopher knows what he’s doing.

At the time of publication, Dana Blankenhorn held long positions in JD, AMZN and BABA. 

Dana Blankenhorn has been a financial and technology journalist since 1978. 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


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