To The Moon

$JD.com(JD)$

I will conduct a fundamental analysis of JD using Warren Buffett’s investing framework. I review six key financial metrics and estimate three potential fair values to determine JD.com’s current worth in the stock market.

As of now, JD is trading at $35.34 per share. It’s up 2.41% on the latest trading day and 27% since January 2024, outperforming the S&P 500, which has risen 20%. However, over the past five years, JD has under performed the market with only 8% returns, despite strong performance up until 2023. Since going public a decade ago, JD has delivered a 53% return. In recent months, however, their stock price has struggled. Currently, JD offers a 2.1% dividend yield, adding to shareholder gains. The stock is trading $12 below its 52-week high and $15 above its low. JD is one of the leading Chinese e-commerce companies with a $50 billion market cap.

Let’s dive into the metrics:

Returns on Capital

A company’s returns on capital should ideally exceed 14%. JD’s returns on capital have been improving steadily since 2021, rising from 1% to 8% by the end of 2023. Over the past five years, their average return on capital is just 4.5%, well below the desired threshold. Despite this, the upward trend is promising.

Recent Trend: As of 2023, JD’s ROC has risen from a low of 1% in 2021 to 8% by the end of 2023. This upward trend is promising, signaling improved capital efficiency.

5-Year Average: Over the last five years, JD’s average ROC stands at 4.5%, which is significantly below the 14% threshold typically considered optimal for a business.

Sales, Earnings, and Cash Flow Growth

JD has grown its sales by 92% over the last five years. Earnings have doubled, and free cash flow has nearly doubled as well, signaling stronger profitability. However, their sales have been flat in the last three years, which may reflect weaker consumer spending in China.

Shareholder Ownership

JD is part of the portfolios of five major investors, including Michael Burry, who holds a significant position (24% of his holdings). Other notable investors include David Teer, Howard Marks, and Chris Davis.

Earnings Per Share (EPS) Growth

JD's EPS has fluctuated, but it has generally improved in the last few years. In 2024, EPS is projected to be $3.20. They have also repurchased 4.6% of shares, enhancing shareholder value.

Cash Flow Per Share

JD has consistently posted positive cash flow per share, even when earnings were negative in 2021. Their cash flow has grown nearly 100% since 2019, marking another positive sign.

Bonus 1: Dividend Safety

JD’s 2.1% dividend yield is covered by both their earnings and cash flow. Their payout ratio is only 23%, and they increased dividends by 23% last year. This demonstrates that their dividend is sustainable.

Balance Sheet Health

JD has a net cash position, with $14.6 billion in cash and positive cash flow over the past five years. Their balance sheet is in solid shape, providing further financial stability.

Short-Term Liquidity

JD’s current ratio has been below 1.5 for the past five years. While this may be concerning in some cases, for e-commerce companies like JD, a lower current ratio can indicate business strength as they benefit from better terms with vendors.

Valuation

We’ll now look at three valuation methods. The first gives JD a 10% free cash flow yield, well above the benchmark. In a discounted cash flow (DCF) model, assuming 5.12% annual growth for the next decade and 4% in the following decade, the fair valuation of JD might be as high as $49 per share. A second method, the GF Value, estimates the stock’s value at $42 per share, up 155% from its current price.

Long Thesis JD has introduced policies that boosted its user base, increased purchase frequency, and improved profit margins. Their adoption of AI has enhanced customer experience, leading to market share gains.

Short Thesis On the flip side, JD’s brand suffers from poor customer perception regarding product quality and competitive prices. The shift to a third-party platform has led to lower-than-expected sales. Additionally, profitability has been impacted by higher employee costs and heavy investments.

Conclusion

JD passes five of six key metrics in my analysis. Despite a recent decline in returns on capital, the company’s sales, earnings, and cash flow have been growing, and it has a strong balance sheet. JD is trading at an attractive free cash flow yield, and their 2.1% dividend yield is well-supported. After considering all factors, the fair value for JD comes to around $47.90 per share, offering a potential upside of $14 from its current price.

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