Some investors no doubt are looking to take profits in JD.com (NASDAQ:JD) stock. Others might believe it’s too late to enter, given that shares have rallied 87% year-to-date.
I don’t believe either is the case. In fact, I’d point those investors to Amazon.com (NASDAQ:AMZN).
To be clear, I’m not saying JD.com is the same as Amazon. I’m not saying it’s the “next” Amazon, or that it has a path to reach $3,000 per share like its American online retail counterpart. These are two different stories.
Rather, I’m trying to highlight Amazon as an example of how to look at a name like JD stock. Investors have been decrying Amazon stock as “too expensive” for years. There are hundreds of investors who took profits at some point in that stock’s stunning rally over the past few months.
If you’re fortunate enough to own a wonderful company with a massive opportunity, the wisest choice usually is to keep owning that company. What the price used to be at some point in the past doesn’t really matter in terms of whether that stock is worth holding in the present.
And I continue to believe that JD stock is worth owning.
Earnings Support the Case
It would be one thing if the rally in JD stock, most of which has come since the beginning of May, didn’t have a fundamental underpinning. But it does.
This seems like a better company than it was at the start of the year. All else being equal, JD stock should be higher.
First-quarter results in May are one piece of good news. JD.com’s numbers crushed Wall Street estimates. Its outlook for the second quarter was well above analyst consensus as well.
It’s easy to forget, but it wasn’t that long ago that investors were worried about JD.com’s underlying profitability. The company was investing behind the business, which it argued was obscuring its true earnings power. The market fretted that the problem was that JD.com couldn’t compete well enough with Alibaba (NYSE:BABA).
But JD.com has steadily dispelled those worries. It did so again in the first quarter, during which the coronavirus hit China hard. Operating margin actually expanded year-over-year. Meanwhile, revenue increased more than 20%.
In part due to that performance, expectations for next year have risen. The Street’s expectations for 2021 earnings have been rising over the last 90 days.
Clearly, investors are projecting faster growth going forward. That’s a key reason why JD stock has rallied, and it’s a key reason why investors shouldn’t be looking at early May prices near $40 as a sign that the stock has gone “too far.”
More Good News
Since the Q1 release, JD.com has given investors more reasons for optimism. In June, the company listed shares on the Hong Kong Stock Exchange. The offering was oversubscribed by 179 times (in other words, investors asked for 179x the amount of shares available).
Clearly, there’s huge demand for JD stock in Asia as well.
The same day, JD.com had a record showing at its annual 618 shopping festival. Its haul rose 30% year-over-year.
If there were worries about the lingering effects of the coronavirus on online shopping demand, JD.com’s performance should dispel those worries. (Alibaba and Pinduoduo (NASDAQ:PDD) posted strong numbers as well.)
This is a company firing on all cylinders. It’s a company for which investors, particularly in this market, likely would expect to pay a premium.
JD Stock Isn’t That Expensive
But, surprisingly, JD stock doesn’t have some sky-high valuation. Using next year’s profit estimates, the stock trades at just 45x earnings.
That is a premium to Alibaba stock, admittedly. But JD.com’s earnings are growing faster. At the least, 45x earnings is not an aggressive multiple when U.S. tech names are trading in some cases for multiples of 200x or higher.
It’s certainly an attractive multiple to pay for a business performing like JD.com is. That is what truly matters — not what the stock price was a few months ago.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.