JD.com: Cheap, but the Moat Has Narrowed

GuruFocus2023-10-11

SummaryJD's focus on authentic products and efficient logistics has kept it from losing market shares.The company has experienced past growth and improved profitability, but now faces strong ...

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SuperDuper1
2023-10-11
SuperDuper1
JD giving subsidies is bad.. Tesla cutting prices is good? Quite biased research in my Opinion and not based on current fundamentals..

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(JD, Financial) is one of the largest e-commerce platforms in China, with a strong focus on authentic products and best-in-class logistics. It is often called China’s Amazon (AMZN, Financial) because it is similar to the company in several ways.Most importantly, it operates as both a first-party retailer as well as a marketplace for third-party sellers. JD is also the only Chinese e-commerce player which invested heavily to build its own logistic network. From the very beginning, the company has prided itself in only selling authentic products. Product quality and super-fast delivery was JD’s moat, which helped it maintain a loyal customer base and kept it from losing market share to PDD Holdings Inc. (PDD, Financial) and short-form video platforms such as Douyin and Kuaishou.However, during the past two years, JD’s reputation has been damaged, and the recent decision by Richard Liu to start a pricing war with PDD and Alibaba (BABA, Financial) may very well be one of JD’s most costly mistakes in its history.Recent growth and improving profitabilityThe e-commerce industry in China has been growing rapidly in recent years, driven by the increasing use of mobile devices and internet access. Before the rise of PDD and Bytedance, JD.com has been able to capitalize on this trend and grow its market share, becoming one of the top e-commerce players in China.JD’s revenue has grown at a compound annual growth rate of 20.8% over the past five years, primarily driven by the strong growth of e-commerce sales in China. The company’s gross margin has remained stable at around 8% and its net profit margin has also improved from negative in previous years to 2%, reflecting its improving profitability and cost-control measures.Pricing war is irrationalAt the beginning of 2023, JD announced a strategic pricing war with PDD and Alibaba. Internally, it is a very controversial move, one I think could be a very costly strategic mistake for several reasons.First of all, PDD is much more efficient than JD and has a cost advantage. Theoretically, PDD can outprice JD in most product categories due to its cost advantage. This is exactly what PDD is doing. Therefore, unless JD is willing to irrationally subsidize its customers, its pricing war will not work at all. Second, JD’s moat was based on brand value and premium products. And the anchor of brand value is pricing power. The company’s large-scale subsidy will make consumers question the value of products, and thus affect its brand image.Last but not least, even if JD is successful in its pricing war, once the subsidies are reduced or cancelled, it may lead to consumer loss. This will not only affect JD's sales, but also its user base and market share.Therefore, although JD's billion-yuan subsidy may bring some benefits in the short term, in the long run, this strategy is very likely to have a negative impact on JD's business.ConclusionJD was once a very strong e-commerce leader with a wide moat. But during the past two years, mismanagement and strategic errors have considerably hurt the business. Going forward, the company’s revenue growth and profitability may face significant challenges. The company's valuation does look very cheap at this point. The stock trades at only 0.31 times forward sales, whereas Amazon trades at 2.3 times forward sales and Alibaba trades at 1.67 times forward sales. This indicates the market may already have priced in JD’s possible deteriorating fundamentals. But given the possibility of prolonged fundamental decline, I am not convinced that JD is very undervalued either.","kind":null,"is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":229327899230448,"gmtCreate":1697030178688,"gmtModify":1697032206321,"author":{"id":"4136897647765072","authorId":"4136897647765072","name":"SuperDuper1","avatar":"https://community-static.tradeup.com/news/default-avatar.jpg","vip":1,"crmLevel":9,"crmLevelSwitch":1,"idStr":"4136897647765072","authorIdStr":"4136897647765072"},"htmlText":"JD giving subsidies is bad.. Tesla cutting prices is good? Quite biased research in my Opinion and not based on current fundamentals..","listText":"JD giving subsidies is bad.. Tesla cutting prices is good? Quite biased research in my Opinion and not based on current fundamentals..","text":"JD giving subsidies is bad.. Tesla cutting prices is good? Quite biased research in my Opinion and not based on current fundamentals..","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/229327899230448","repostId":2374523256,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":2,"commentSize":1,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2374523256"}