JD.com: Looking Beyond The Short-Term Disappointment
FangXiaNuo
$JD.com(JD)$ (NASDAQ:JD) stock sold off sharply - down as much as 11% - after the company reportedQ4 2022 results. Although the Chinese e-commerce giant posted a solid/ mixed performance in the December quarter, investors were arguably disappointedabout a somewhat softer than expected FY 2023 guidance. While I acknowledge investors' disappointment that JD's short-term outlook may be more challenging than anticipated, I maintain a positive outlook on the e-commerce giant's long-term potential. And reflecting on a competitive business model, paired with a cheap valuation, I reiterate a "Buy" recommendation.
For reference, since the start of 2023 JD stock has strongly under-performed the S&P 500 (SP500) benchmark. JD stock is down about 27% YTD, as compared to a gain of approximately 2.5% for the SP500.
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JD's December Quarter 2022
JD reported mixedQ4 FY 2022 results,missing analyst consensus estimates with regards to revenue, but beating with regards to earnings. During the period from September to end of December, China's largest e-commerce platform generated sales of about $42.43 billion, as compared to approximately $42.2 billion expected by analysts (according to data collected by Bloomberg). In addition, although JD materialized a 7% year-over-year expansion versus the same period one year earlier, the company's growth slowed down sharply compared to a rolling 5-year CAGR of greater than 20%.
On a segment basis, product revenues expanded 1% YoY, to $34.4 billion, and service revenues expanded 40% YoY, to $8.4 billion respectively. Accordingly, while the product segment might have reached some level market saturation, the service segment, which includes marketing and logistics services, remains a growth vertical.
JD Q4 2022 results
With regard to profitability, JD's operating income increased from about $0.76 billion in Q4 2021 to $1.14 billion in Q4 2022 - driven by a slight topline expansion as discussed, paired with a 90 basis point jump in the operating income margin. On a similar note, JD's non-GAAP net income attributable to shareholders increased to $1.1 billion, doubling as compared to $500 million during the same period in the previous year, and beating consensus estimates by close to $150 million (according to data collected by Bloomberg).
JD Q4 2022 results
JD's Q4 2022 resultswere not too bad - certainly not bad enough to justify an 11% sell-off -- in my opinion. In fact, anchored on cost discipline and profitability expansion, JD management even announced a cash dividend of $0.62 per ADS, with the payment date expected as early as April 27, 2023. Moreover, the e-commerce giant flagged that the company plans to continue paying dividends to shareholders on a more regular basis (annually).
Outlook for Disappoints Against Expectations
Expecting that the COVID-reopening in China would fuel a consumption boom similar to what has been observed in 2021 in the U.S. and Europe, analysts raised their 2023 macro expectations for China's economy. For reference, as compared to economic growth of only about 3.3% in 2022, Goldman SachsexpectsChina's economy to expand by 4.5% in 2023, and Morgan StanleyestimatesGDP growth of 5.4% respectively. But JD management's comments in thepost-Q4 conference callwith analysts pointed to a somewhat more cautious outlook going into 2023 (emphasis added):
In a post-COVID era, customers' lifestyles and preferences have notably changed. We have seen the polarized trends of consumption patterns and spending power. On one hand, the number of middle class and household users who attach great importance to the quality and function of goods is expanding. On the other hand,consumers have become more meticulous in their spending.
JD, however, did not give any guidance in financial terms.
JD's muted optimism comes at a time when competition for e-commerce shoppers is heating up (think competition with Pinduoduo (PDD) and Alibaba (BABA)), as a saturated market leaves little organic growth opportunities outside of taking market share from competitors. With that frame of reference, it is worth pointing out that JD recently announced apromotion strategyworth up to $1.4 billion, and scaled e-commerce ambitions in South East Asia.
Long-Term Prospects Remain Bright
Although I share investors' disappointment about the realization that JD.com, Inc.'s short-term outlook might continue to be more challenging than hoped and expected, I remain bullish on the e-commerce giant's long-term prospects. Investors should consider that JD has undoubtedly managed to claim a leading position in China's large e-commerce market. And given the investment-insensitivity of the business model infrastructure, at this point it would be close to impossible for a new entrant to replicate JD's success -- likely prompting JD to shift from growth to operating profitability. Or as CEO Lei Xu commented:
In the long-term, JD is committed to play an important role in people's daily lives and the country's economic development. We will work to ensure healthy and sustainable business development along the way to create long-term value for our users, business partners and shareholders
With that frame of reference, investors should consider that JD.com, Inc.'s adjusted earnings power is anchored somewhere around $4.5 billion (net income attributable to shareholders). Referencing an enterprise value of about $58.5 billion of early March 2023, JD.com, Inc. stock is effectively valued at an EV/EBIT of approximately only x13. Personally, Icontinueto promote a $92.89/share target price for JD.com, Inc. stock; and I reiterate a 'Buy' recommendation.
Source: Seeking Alpha
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