A tough Call for JD Stock

Summary

• JD stock has suffered from rising geopolitical tensions, a heightened regulatory environment, and the divestment of its shares by major shareholder Tencent.
• Yet, JD stock has been relatively resilient versus its peers, both Chinese and global, over the past year. JD's financial numbers have improved substantially, making its valuation much more attractive.
• With Walmart as the largest corporate shareholder of JD, and potentially increasing its stake, we can expect the American retail giant to help shield JD from negative U.S. policies.
• JD has established beneficial overseas expansions and international cooperation which should boost its revenue growth in the coming quarters and years.

How Did JD Stock Do In 2021?

Specific to JD.com, Inc. ($($JD.com(JD)$ )$)($JD-SW(09618)$ ), its shares also suffered from an overhang in late December as Tencent Holdings ($Tencent Holding Ltd.(TCTZF)$ ) announced its plan todivestnearly all of its holdings. The distribution of 457 million shares through a special dividend to its shareholders is expected to lead to selling pressure from those who do not wish to hold JD stock.

Furthermore, Tencent's stake in JD would fall to a mere 2.3 percent from 17 percent. Inevitably, there was some concern regarding the potential impact of diminished support from the gaming and social media giant following the steep reduction in ownership.

Nonetheless, with a price decline ofjust20.3 percent in 2021, it may be superlative to say JD stock had a terrible year. While no shareholders would be proud to say the stock they owned lost one-fifth of its value in a year, it's a consolation considering other Chinese e-commerce stocks lost much more.

The industry flagbearer Alibaba Group Holding ($Alibaba(BABA)$ ) dropped 49.0 percent for the full year of 2021. Pinduoduo, Inc. ($Pinduoduo Inc.(PDD)$ ), a previous favorite among e-commerce investors for its high revenue growth, plunged 67.2 percent in the same period. Vipshop Holdings Limited (VIPS), a niche e-commerce player focusing on the luxury segment, saw its share price soar more than 60 percent in the first quarter of 2021 before losing it all and more to end the year down 70.1 percent.

Price change chart of Chinese e-commerce stocks

Is JD Stock Overvalued? JD Stock Key Metrics

Although Alibaba Group is often referred to as the Amazon (AMZN) of China, JD is more similar to Amazon with regards to its e-commerce model, where most of its revenue is derived from first-party online sales. Yet, JD is not a cloud computing behemoth. However, it has a sizable fintech business that Amazon lacks.

When it comes to Chinese e-commerce stocks, Alibaba, Pinduoduo, and JD are the top three names. For investors preferring to have a pure-play on digital shopping, PDD and JD are the dominant choices. The former, however, relies heavily on third-party logistics companies to handle shipping while the latter has long invested in its delivery fleet.

Without a true equivalent, it isn't fair to determine if JD is overvalued or not by comparing its stock metrics with its peers. An SA readercommented in a recent articlethat the share price of e-commerce and cloud services titan Alibaba "will reach 0.01 cent (or negligible value) by July 2023." That is to say, he deemed BABA as severely overvalued presently, even after its precipitous fall over the past year. What more can we say of JD which has a fraction of BABA's market cap?

Hence, I reckon it is more fruitful to compare JD to itself over the past years. JD's price-to-earnings ratio on a forward basis is presently 32.2 times, the lowest it has been since the second quarter of 2020 and more than half that of the peak achieved in February 2021.

JD.com PE ratio (forward basis)

As Chinese companies navigate the more stringent regulatory environment and demonstrate their commitment to Beijing's 'common prosperity' drive, it helps to have ample cash on hand. JD's net cash, measured by its net financial debt, is at $26.4 billion as of the last reported quarter (Q3 2021), its highest ever. To provide another perspective, JD's net cash has reached 23.5% of its market capitalization.

JD.com net financial debt

That cash build is supported by JD's improving free cash flow which has climbed to $6.3 billion in the third quarter of 2021. This is the highest quarterly figure in its operating history.

JD.com free cash flow

At the same time, JD's book value has risen over the years and it more than doubled from two years ago. JD's market cap has also climbed steadily from late 2018 to early 2021, quadrupling in that period.

JD.com book value

However, when we look at the price-to-book value, the ratio is now around 3.2 times. This is near to the trough levels in July 2021 when the Chinese government announced that the after-school tutoring industrymust become non-profit, as well as in November 2018 at the height of the U.S.-China trade tensions.

JD.com price to book value

We are past the peak pessimism and uncertainty like we have experienced in the two mentioned events. Thus, with JD trading at near the trough P/B ratios and far from the five-year average, it is hard to argue that JD is currently overvalued.

Seeking Alpha's quant rating disagrees though. JD has a valuation grade of D+, deteriorating from C- three months ago and C+ six months ago. Nevertheless, note that the grades are relative to the broad Consumer Discretionary sector. JD's heavy investments in its logistics infrastructure for its own fulfillment puts it at a disadvantage on such valuation metric comparison. It is more insightful to consider its current valuation is substantially lower than its five-year average.

JD valuation grade and underlying metrics (sample)

Where Is JD Stock Heading In 2022?

Since October 2021, SA authors have rated JD stock as a 'Buy' or 'Strong Buy'. The consensus rating by Wall Street analysts is 'Strong Buy', the same for the quant rating for JD.

Ratings summary of JD stock

JD's 'Strong Buy' quant rating came despite scoring D+ for valuation. Its C+ grade for growth is also a deterioration from three months ago. JD's stock momentum earns a lackluster B- grade but it does have two other A-rated factor grades though - profitability and revisions.

Factor grades of JD stock

Its 'Very Bullish' quant recommendations "represent the culmination of powerful computer processing and 'Quantamental' analysis. The backtest trading strategy shows the effectiveness of our autonomous Very Bullish stock selection model."

It bears noting that the backtested strategy has proven to yield impressive returns compared to the S&P 500, over the last 10 years. It has outperformed the market nine out of 10 years.

The overall quant rating is not an average of the factor grades listed. Rather the metrics with the strongest predictive value have a greater weight. Also, we should note that JD has its factor grade for revisions upgraded from D to A, a substantial jump in six months, and despite ongoing regulatory headwinds facing Chinese internet stocks. This suggests that analysts could have been too pessimistic previously about the impact of the challenges facing JD on its business prospects.

Beneficial overseas expansions and international cooperation

Business-wise, there are positive developments. On January 10th, 2022, JD openedtwo robotic shopsby the new brand name "ochama" in the Netherlands. It marked the first time that the Chinese e-commerce and retail giant has opened a physical retail store in Europe.

"With rich experience in retail and cutting-edge logistics technologies that the company has accumulated over the years, we aspire to create an unprecedented shopping format for customers in Europe with better price and service." - Pass Lei, general manager of ochama, JD Worldwide.

ochama Netherlands

ochama stores also serve as a showcase of JD's technological prowess. An automated warehouse is part of its futuristic pick-up shop. Shoppers can view a fleet of robots including AGV (automated ground vehicles) and robotic arms that engage in picking, sorting, and transferring the merchandise. By simply scanning the QR code on ochama app at the check-out, shoppers will enjoy the experience of seeing their orders being carried to them by the conveyer belt, as part of a cashierless and hassle-free shopping trip.

ochama Netherlands (warehouse)

As the Chinese e-commerce and retail market becomes more competitive, JD's expansion overseas could provide a positive boost to its revenue growth. In its quest to derive greater revenue from global markets, JD is savvy to offer a win-win arrangement with diplomats based in China.

10 senior diplomats, including eight ambassadors to China from Argentina, Chile, Georgia, Malaysia, Moldova, Peru, Rwanda, Sri Lanka, as well as the Charge D'affaire with the rank of ambassador from Danish Embassy and Italian Trade Commissioner in Beijing on behalf of the Italian ambassador, were invited by JD asspecial delivery envoysto meet face-to-face with local Chinese customers who ordered products from their respective countries.

Diplomats as JD's couriers

All the products involved in this initiative were imported by JD Worldwide and JD Fresh, the cross-border e-commerce and the fresh produce units of JD respectively. The press reporting in China and the diplomats' countries on the personal deliveries should have brought JD plenty of positive media coverage.

On January 18, 2022, JD.com and Shopify (SHOP) announced the creation of astrategic partnershipto give independent brands in the U.S. "a simple, trusted way to access consumers in China" and enables Shopify merchants worldwide to access JD's quality supplier network as well as JD's 550 million active customers in China. Instead of the 12 months typically required for international brands to begin selling in China, JD's streamlined channel will allow Shopify brands to do so in 3-4 weeks.

JD-Shopify partnership

Through the partnership, JD will benefit from greater utilization of its logistics infrastructure. The press release suggests JD's global-reach supply chain network will provide the end-to-end fulfillment service from the US to China, leveraging its China-US cargo flights as well as over 1,300 warehouses in the U.S. and China.

Its property arm, JD Property, is also actively expanding internationally. On December 31, 2021, JD Property held agroundbreakingceremony in Vietnam for its intelligent logistics park project. Upon completion, the park will provide logistics solutions and warehousing space for clients from various industries.

JD Property's Vietnam industry park

Tencent Holdings' divestment of JD is a blessing in disguise

As mentioned early on, following the share distribution, Tencent would be left with a 2.3 percent stake in JD, down from 17 percent. Walmart (WMT) would become the second-largest shareholder after the founder Richard Liu Qiangdong with its 9.3 percent ownership. Like many American companies seeking revenue growth in China, I expect Walmart to raise its stake in JD with the virtual exit of Tencent.

Walmart executives could have been wanting to deepen its cooperation with JD, though this may be difficult with Tencent as the largest shareholder of JD previously. Walmart could also see an opportunity to buy in the open market the shares of JD upon weakness in prices triggered by Tencent shareholders receiving JD shares as a dividend. Large shareholders of Tencent like Prosus N.V. (OTCPK:PROSY)(OTCPK:PROSF) may approach Walmart directly to offload their JD shares.

In other words, Walmart could be more deeply involved with JD and it is in its interest to protect the Chinese retailer and e-commerce giant from any detrimental U.S. policies such as theforced delistingof Chinese ADRs by the Holding Foreign Companies Accountable Act (HFCAA) and inclusion into aninvestment blacklist.

Is JD Stock A Buy, Sell, or Hold?

When investors turn their attention from the political tensions to JD's business fundamentals and prospects, they could find its stock valuation attractive. It can be argued though that shareholders are already cognizant of this, given that JD stock has been relatively resilient versus its peers, both Chinese and global.

Apart from AMZN, JD has outperformed the major international e-commerce stocks in the past year. Shopify Inc., Etsy Inc. (ETSY), Sea Limited (SE), and MercadoLibre Inc. (MELI) have seen their share prices decline 29.4 percent to 45.1 percent in the past year while JD is down 27.3 percent.

Data by YCharts

With the valuation reset in many tech stocks in the past months, the correction in JD now appears relatively tepid. Investors have an expanded list of 'bargains' to pick from. Thus, it is a tough call to say JD is a better buy over the other battered tech stocks.

Nevertheless, as discussed in the earlier sections, JD's valuation is attractive relative to its historical range and the company has several exciting endeavors that could propel revenue growth in the coming quarters and years. With Walmart as the largest corporate shareholder of JD, we can expect the American retail giant to help shield JD from negative U.S. policies. Hence, JD stock deserves a 'Buy' rather than a 'Hold'.

Source: Seeking Alpha