To The Moon

$JD.com(JD)$ just released its Q2 earnings, and they beat analyst expectations. The stock popped 6% pre-market but quickly lost steam, leaving us wondering why it’s struggling.

Here’s the scoop:

JD.com reported revenue of ¥291.4 billion, slightly above the forecast of ¥290.5 billion. EPS came in at 8.19, higher than the expected 4.955.

1.Revenue and Profit

At first glance, the profits look impressive, but the details tell a different story.

Revenue only grew 1.2% year-over-year, showing a sharp slowdown in growth.

JD.com’s management blames last year's high base for electronics and home appliances. In fact, JD.com's revenue from electronic products and household appliances was ¥152.1 billion, with a year-on-year increase of 11.4%.

But, last year’s numbers weren’t that high, and the growth during Shanghai’s peak pandemic was in the double digits. This year, electronics and home appliances revenue fell 4.65% YoY, and the broader retail scene isn’t looking good either. For July, home appliances and audio equipment sales dropped 2.4%, with a modest 2.3% growth for the first seven months.

The home appliance market is linked to real estate. With July seeing a decline in housing prices and new completions expected to fall, the outlook for home appliances remains uncertain.

Since home appliances and electronics make up nearly half of JD’s revenue, the slowdown hits hard. With its core business struggling, JD.com is pinning its hopes on daily necessities, especially large supermarket categories. In Q2, daily necessities revenue reached ¥88.8 billion, a year-on-year increase of 8.7%, slightly exceeding analysts' expectations of ¥88.3 billion!

Although the growth rate is higher than the overall, it should be noted that there was a "low base" effect in the same period last year, with revenue of ¥81.7 billion, a year-on-year decline of 8.6%.

2.Future Outlook

In the second half of the year, as the advantage of the low base for daily necessities gradually fades, how will JD.com perform in this business?

It's worth looking forward to, but don't hold out too much hope.

JD Logistics' revenue was ¥44.2 billion, a year-on-year increase of 7.7%, falling short of analysts' expectations of ¥44.5 billion.

Logistics, once a strong driver, has now stabilized. Platform and ad revenue are growing in the low single digits, showing little potential for high growth.

With revenue growth slowing, JD.com and other tech firms are concentrating on cutting costs and boosting efficiency. In Q2, JD's sales expenses hit ¥11.9 billion, up 7.3% YoY. Management costs were ¥2.13 billion, down 9.6% due to reduced stock-based compensation. R&D expenses came in at ¥4.2 billion, a 3.6% increase.

The overall expense ratio for Q2 was 6.2%, up from 6% last year. This shows JD isn’t just slashing costs but is focused on improving efficiency.

In the Q2 report, management highlighted that during major sales events, JD improved its price competitiveness through supply chain strength and disciplined investments rather than relying on subsidies. This approach helped JD's gross margin jump by 137 basis points to 15.8%, reaching a multi-year high.

JD.com’s Q2 operating profit hit ¥10.5 billion, up 27% YoY, with the operating margin rising from 2.9% to 3.6%. That’s impressive.

However, the net profit surge of 96% is less exciting. It’s inflated by non-operational gains, like government subsidies, investment income, and asset sales, which skew the true performance.

3.Low-Growth Era

So while JD’s earnings beat expectations, the reality is that in this low-growth era, they’re relying heavily on cost-cutting and efficiency to boost profits. With a P/E ratio around 10x, the stock isn’t exactly a bargain compared to its single-digit growth. The fierce e-commerce competition and sluggish consumer environment make it even less attractive to investors.

And about their share buybacks: JD repurchased about $2.6 billion worth of shares by the end of Q2. They still have $400 million left from the $3 billion buyback plan approved in March 2024.

But here’s the kicker—JD issued $2 billion in convertible preferred shares in May 2024, set to mature in 2029. These shares could convert into about 8.75 million A-shares or 4.38 million ADRs. Given JD repurchased 13.68 million A-shares (or 6.84 million ADRs) by June 30, 2024, this effectively cancels out the potential dilution from the new shares.

Looks like JD's buyback might not have made much of a dent!