JD.com: Good Returns Potential As The Ship Is Turning Around

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JD.com: Good Returns Potential As The Ship Is Turning Around

seekingalpha2023-09-01

JD.com is down 40% year-to-date compared to positive 6% for Alibaba stock and a 20% jump by Pinduoduo.There have been a number of headwinds for JD.com in this year but the current correction seems to ...

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D1234
·2023-09-01
Need volume to support the upward momentum. If not, challenging.
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Barbarazhao
·2023-09-01
Good points
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Some of this decline is due to company-specific issues which include a decline in market share within China as Pinduoduo  has reported a better growth rate. However, the stock correction seems to have been overdone. If the management is able to post even modest results in the next few quarters, we could see a significant bull run within JD stock.The company is trying to improve operating leverage with more efficient logistics. It has also eliminated international business and decided to focus on the business in China. The EPS estimates for fiscal 2025 are in a range of $4 to $5 which means the stock is trading at under 7 times the EPS estimate of 2025. The current slowdown in the overall economy will remain a headwind for the company, but it is highly likely that any improvement in macroeconomic situation and lower regulatory challenges will improve the bullish sentiment towards the stock. The company has been investing heavily in logistics for the last few years, which improves its long-term moat.Massive correction in the stock priceIncrease in geopolitical tensions has negatively affected many Chinese stocks. The lack of a big rebound in China's economy after the end of pandemic restrictions has also been a headwind for many stocks. However, JD's stock price has been one of the worst performing within China in YTD.Figure 1: JD's price movement along with Alibaba and PDD in YTD. Source: YchartsThe bearish run in JD stock seems due to lower performance in key metrics compared to other competitors. PDD has reported a good result and has beaten analysts estimates for the last few quarters. In the recent quarter, PDD reported 66% revenue growth on a YoY basis. This was significantly above the growth reported by JD. Looking at this metric, we can say that JD is losing market share within its Chinese ecommerce business.Turning the ship should not be difficultThere have been a number of reasons why JD's performance has been lower than its peers. JD has moved away from its international business in Southeast Asia. This seems a correct decision because it would have required massive resources for the company to gain a foothold in this region. Alibaba's (BABA) Lazada is already a key player with massive investments from Alibaba.JD has also not reported good results in low-cost ecommerce business called Jingxi. The rapid growth of PDD forced JD to launch its own low-cost option, but this hurt the margins of the company. PDD also has the strong backing of Tencent, which helps in attracting customers. JD is now focusing on its core ecommerce business, which should help in improving the margins. It is highly likely that JD will be able to improve its EPS trajectory by going back to basics in its ecommerce business.Figure: EPS trend of JD in the last few quarters. Source: YchartsJD has already shown improvement in EPS over the last few quarters. Improvement in logistics efficiency should help in increasing the EPS for the company and also reduce the need to offer massive incentives to attract customers.Revenue growth is the keyJD's YoY revenue growth fell behind Alibaba in the recent quarter. It is significantly behind PDD's growth rate. The forward revenue growth estimates of JD are modest, which can reduce the bullish sentiment towards the stock. However, this also makes it easier for the company to beat the estimates and surprise Wall Street. This is what happened in the recent quarter when the company beat the estimates on revenue and EPS.Figure: YoY revenue growth and forward revenue estimates. Source: YchartsThe international business was a distraction for the management. A strong focus on the Chinese ecommerce business should improve the growth trajectory of JD.Figure: JD's PS ratio compared to historical trend. Source: YchartsPrior to the pandemic, JD was trading at a PS ratio between 1 and 1.2. The current PS ratio of 0.34 is less than a third of the pre-pandemic average. The regulatory headwinds are reducing in China, which can seen by the recent approval of multiple spinoffs for Alibaba and other companies. It is also highly likely that the Chinese government will need to announce some fiscal measures to boost the flagging economy. This should be a tailwind for JD and allow the company to surpass the consensus estimates.Even at a modest PS ratio of 0.6 to 0.8, JD stock could reach $60 which would give the shares over 80% upside potential from the current price. It is also important to note some of the downside risks facing the company.Downside risks for JDThere are a few risks that can derail a bullish rally in JD. The company needs to improve its YoY revenue growth trajectory. The overall e-commerce industry in China is still growing at a decent pace. If JD does not deliver revenue growth similar to other peers, then it could lose its market share within e-commerce segment. In the recent quarter, JD reported the lowest YoY revenue growth among the three major e-commerce players. Investors need to closely watch this metric in the next quarter. If JD does not reduce the YoY revenue growth gap with Alibaba and PDD, then we could see more bearish calls for the stock.Another downside risk for JD is slower operating margin growth. JD has a massive logistics business, and it has invested heavily in robotics and AI to help improve the operating leverage. Wall Street would closely watch out for the future operating margin trend in the company. In the recent quarter, JD has been able to beat the EPS estimate by reporting net income per ADS of $0.74 compared to an estimate of $0.68. It would be very important for the company to continue outperforming the consensus estimate in order to build a bullish sentiment. While the stock still faces some downside risks, the cheap valuation multiple and above-mentioned tailwinds should help the company.Impact on stock priceJD stock is trading at its lowest valuation multiple, with a forward PE ratio of close to 10. This is significantly below the long-term average, and we could see a reversion to the mean valuation multiple if JD delivers good results for a single quarter. The regulatory challenges are also reducing, which should help boost the bottom line as the company focuses more on margins instead of social initiatives.Figure: Forward PE multiple of JD, BABA and PDD. Source: YchartsThe competitive pressure from a rapidly growing PDD will remain in the future, but JD is in a strong position to improve its basic performance metrics. At the current price, Wall Street is pricing the stock with a worst-case scenario. This is highly unlikely if the macroeconomic situation improves in China, and the focus of the management on improving its basic metrics should also help deliver better results in the next few quarters.Investor TakeawayJD's stock has been one of the worst-performing Chinese stocks in YTD, with a 40% correction. On the other hand, PDD stock has seen a 20% growth in YTD, which shows that some of the issues of JD are company-specific. The management is now focusing on its ecommerce business in China and is trying to improve margins through operating leverage. This should help the company deliver better EPS growth than current estimates.Even one or two quarterly beats in key metrics can improve the bullish sentiment towards JD and lead to a significant bullish momentum in the stock. At the current price, there is a strong upside potential in the stock with very few headwinds, making it a good buying option.","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":[{"id":215221062447104,"gmtCreate":1693574909247,"gmtModify":1693574914664,"author":{"id":"3573810296615865","authorId":"3573810296615865","name":"D1234","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"Need volume to support the upward momentum. If not, challenging.&nbsp;","listText":"Need volume to support the upward momentum. If not, challenging.&nbsp;","text":"Need volume to support the upward momentum. If not, challenging.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/215221062447104","repostId":2364211991,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":215202465816712,"gmtCreate":1693570519191,"gmtModify":1693570523075,"author":{"id":"3576888762442253","authorId":"3576888762442253","name":"Barbarazhao","avatar":"https://static.tigerbbs.com/40f6fdeabe0e8cac300f1fd2a17eb3ac","vip":1,"crmLevel":6,"crmLevelSwitch":1},"htmlText":"Good points&nbsp;","listText":"Good points&nbsp;","text":"Good points","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/215202465816712","repostId":2364211991,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":4,"commentSize":0,"repostSize":1,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false}}