JD.com Inc: Earning Big Returns—From a Chinese E-Commerce Company?

JD.com Inc: Earning Big Returns…from a Chinese E-Commerce Company?
iStock.com/Dilok Klaisataporn

Why JD Stock Deserves a Serious Look

In a time when the U.S.-China trade war often appears in the headlines, who would have thought that a Chinese company listed on a U.S. stock exchange would be soaring?

But it is happening. On August 13, shares of JD.com Inc (NASDAQ:JD) surged more than 12%.

The reality is that, while the trade tension with the U.S. has certainly made the outlook gloomier for many Chinese businesses, the country does have one industry that’s absolutely firing on all cylinders: e-commerce.

According to data from iResearch Consulting Group, the gross merchandise volume (GMV) of China’s online shopping market was 1.9 trillion yuan (US$269.8 billion) in 2013. In 2018, China’s e-commerce GMV totaled 8.0 trillion yuan (US$1.1 trillion). So in just five years, the country’s e-commerce industry expanded more than fourfold. (Source: “GMV of China’s Online Shopping Market Hit 8.0 Tn Yuan in 2018,” iResearch Consulting Group, March 22, 2019.)

Looking ahead, iResearch expects the GMV of China’s online shopping market to keep growing at a double-digit pace to 11.3 trillion yuan (US$1.6 trillion) by 2020.

And that’s where JD.com Inc has found its opportunity.

Headquartered in Beijing, the company operates a huge online retail platform in China. It also happens to be a leading retail infrastructure service provider in the country.

From 2012 to 2018, JD.com’s revenue skyrocketed from 41.4 billion yuan (US$5.9 billion) to 462.0 billion yuan (US$65.6 billion), translating to a compound annual growth rate (CAGR) of 50%. (Source: “JD.com, Inc. Financial and Operational Highlights August 2019,” JD.com Inc, last accessed August 13, 2019.)

JD.com completed its initial public offering in May 2014. Since the company’s shares trade on the Nasdaq, it’s very convenient for American investors to get a piece of the action.

JD.com Inc Is Running a Fast-Growing Business

As I said earlier, the trade tension between the U.S. and China has brought a lot of uncertainty to the stock market, and especially to Chinese companies trading on U.S. stock exchanges. So why has JD stock been soaring?

Well, because the company just delivered a stellar earnings report.

JD.com reported second-quarter 2019 results on August 13. It showed that the company generated net revenues of $21.9 billion during the quarter. The number not only represented a 22.9% increase year-over-year, but also beat Wall Street’s expectation of $20.9 billion. (Source: “JD.com Announces Second Quarter 2019 Results,” JD.com Inc, August 13, 2019.)

What’s even more impressive was the company’s bottom line. For the quarter, JD.com generated a net income of $90.1 million. This marked a substantial improvement because in the year-ago quarter, the company incurred a net loss.

The bottom-line result also surprised Wall Street. On average, analysts expected the Chinese e-commerce company to report a net loss of $6.3 million for the quarter.

Meanwhile, JD.com generated 18.3 billion yuan (US$2.6 billion) in free cash flow in the second quarter of 2019. Again, this was a sizable year-over-year improvement from the 13.1 billion yuan (US$1.9 billion) in the second quarter of 2018.

Faster-than-expected revenue growth coupled with a surprise profit made JD stock the star of the trading day. The company’s shares closed with a 12.9% gain at $30.66 on August 13, making JD.com the top gainer on the Nasdaq-100 for the trading session.

The critics can say what they want, but they cannot deny the fact that JD.com is growing its business at a rapid pace. In its June quarter, the company’s active customer accounts totaled 321.3 million, which was 7.5 million more than what it had in the second quarter of 2018.

One of the strategies that JD.com Inc has been pursuing is partnering with luxury brands. In recent months, the company has struck new partnerships with Prada, Miu Miu, Mulberry, and Giuseppe Zanotti, just to name a few. The availability of premium international brands on JD.com could further boost the appeal of its online shopping platform.

At the same time, just like Amazon.com, Inc. (NASDAQ:AMZN) has “Amazon Prime,” JD.com has its own membership program, “JD Plus.” The program, which was introduced in 2016, offers customers a wide range of perks. In June, the company announced a partnership with 19 international hotel brands to offer JD Plus members special discounts and benefits.

JD.com Inc (NASDAQ:JD) Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

Despite the heightened trade tension between China and the U.S. this year, shares of this Chinese e-commerce giant had quite a rally. Year-to-date, JD stock is up by a whopping 46.5%.

Sure, there’s plenty of geopolitical uncertainty going forward. But with continued expansion in China’s e-commerce industry, JD.com Inc’s business will likely keep growing.