Is There An Opportunity With JD.com, Inc.'s (NASDAQ:JD) 48% Undervaluation?

Simply Wall St.01-30

Key Insights JD.com's estimated fair value is US$44.95 based on 2 Stage Free Cash Flow to Equity JD.com's US$23.46 share price signals that it might be 48% undervalued Our fair value estimate is...

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JD.com's US$23.46 share price signals that it might be 48% undervalued. Our fair value estimate is 7.9% higher than JD.com's analyst price target of CN41.64. In this article we are going to estimate the intrinsic value of JD.com, Inc.  by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow  model on this occasion. Before you think you won't be able to understand it, just read on!It's actually much less complex than you'd imagine.We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. 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(NASDAQ:JD) by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine. \n We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. \n Check out our latest analysis for JD.com \n Is JD.com Fairly Valued? \n We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. \n A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars: \n 10-year free cash flow (FCF) forecast \n\n\n\n\n2024\n2025\n2026\n2027\n2028\n2029\n2030\n2031\n2032\n2033\n\n\n Levered FCF (CN¥, Millions) \nCN¥35.3b\nCN¥38.4b\nCN¥37.3b\nCN¥35.4b\nCN¥39.1b\nCN¥39.4b\nCN¥39.9b\nCN¥40.5b\nCN¥41.2b\nCN¥41.9b\n\n\nGrowth Rate Estimate Source\nAnalyst x7\nAnalyst x7\nAnalyst x2\nAnalyst x1\nAnalyst x1\nEst @ 0.73%\nEst @ 1.18%\nEst @ 1.49%\nEst @ 1.71%\nEst @ 1.86%\n\n\n Present Value (CN¥, Millions) Discounted @ 9.1% \nCN¥32.3k\nCN¥32.3k\nCN¥28.8k\nCN¥25.0k\nCN¥25.3k\nCN¥23.4k\nCN¥21.7k\nCN¥20.2k\nCN¥18.8k\nCN¥17.6k\n\n\n\n(\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = CN¥245b\n We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 9.1%. \nTerminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CN¥42b× (1 + 2.2%) ÷ (9.1%– 2.2%) = CN¥625b\nPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥625b÷ ( 1 + 9.1%)10= CN¥262b\n The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥508b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$23.5, the company appears quite undervalued at a 48% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind. \n\n\n\n  NasdaqGS:JD Discounted Cash Flow January 30th 2024\n \n\n The Assumptions \n We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at JD.com as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 9.1%, which is based on a levered beta of 1.129. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. \nSWOT Analysis for JD.com\n\n\nStrength\n\nEarnings growth over the past year exceeded the industry.\n\n\nDebt is not viewed as a risk.\n\n\nDividends are covered by earnings and cash flows.\n\n\nDividend information for JD.\n\n\n\nWeakness\n\nDividend is low compared to the top 25% of dividend payers in the Multiline Retail market.\n\n\n\nOpportunity\n\nAnnual earnings are forecast to grow for the next 4 years.\n\n\nGood value based on P/E ratio and estimated fair value.\n\n\n\nThreat\n\n Annual earnings are forecast to grow slower than the American market.\n\n\nWhat else are analysts forecasting for JD?\n\n\n\n Looking Ahead: \n Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price sitting below the intrinsic value? For JD.com, there are three fundamental elements you should further research: \n\n Risks: Case in point, we've spotted   1 warning sign for JD.com  you should be aware of. \nFuture Earnings: How does JD's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.\n Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered! \n\n PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.\nHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"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":"4.22.4","shortVersion":"4.22.4","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/2407359891"}