After much speculation about how China-based e-commerce firm JD.com (NASDAQ:JD) would fare following pandemic protocols, investors are breathing a small sigh of relief today. The company brought home a robust earnings and revenue beat in the second quarter, sending JD stock higher. Wall Street credited the company for persevering under difficult circumstances. However, some cracks in JD’s armor have also materialized.
On paper, the e-commerce company reported adjusted income of 61 cents per share. Covering analysts heading into the Q2 disclosure anticipated earnings per share (EPS) of 41 cents. On the top line, JD also rang up $40 billion in revenue. That exceeded Wall Street’s consensus target of $38.5 billion.
Any smashed earnings expectations can generate interest from investors. However, JD’s strong results do come with a caveat. Barron’s notes the following about the results:
“JD.com notched revenue of $39.1 billion in the same quarter a year ago, so the latest three-month period delivered anemic annual revenue growth of 2% in U.S. dollar terms or 5.4% in Chinese yuan terms. That’s a far cry from the blistering annual sales growth […] seen a year ago. In fact, it’s the slowest year-over-year quarterly growth that the company has ever seen.”
Dependency on Chinese Economic Health Weighs on JD Stock
Unsurprisingly, management framed the Q2 results as a struggle against overwhelming outside forces. CEO Lei Xu said the following in a statement:
“JD.com’s resilient business model, industry-leading supply chain capabilities and efficient operations helped us deliver solid quarterly results amidst ongoing challenges in the external environment.”
Still, the main concern for JD stock investors is the company’s dependency on the health of China’s economy. Going back to Q1 2022, the e-commerce giant posted revenue of $37.8 billion, up 18% year-over-year (YOY). At the time, JD also beat the consensus target of $34.7 billion for the period. However, Barron’s notes that the Q1 period coincided with China’s latest lockdowns, demonstrating “how sensitive the company is to the overall strength of the Chinese economy.”
If that’s the case, things don’t look great for JD stock. The New York Times reports that there are currently many headwinds impacting China’s overall stability, including “record-high temperatures and a severe drought in west-central China” which have “crippled hydropower generation and prompted the shutdown of many factories.” The outlet says this is “the latest blow to a Chinese economy that already has stagnant consumer spending and a deeply troubled real estate market.”
Why It Matters
According to The Guardian, the “International Monetary Fund (IMF) last month cut its forecast for China’s 2022 GDP growth by a quarter to 3.3%.” This represents the slowest pace in 40 years (excluding the onset of Covid-19) and comes in below the Chinese government’s targeted 5.5%.
Unless circumstances start to improve broadly, Chinese consumer-facing companies may start to feel significant pressure. As such, investors should approach JD stock with vigilance and caution moving forward.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.