JD.com’s (JD) quarterly earnings continue to provide evidence of the seismic shift in the habits of Chinese consumers. A combination of long-term and short-term market forces are providing typhoon-like tailwinds to online/mobile purchase activity. A position in JD remains the cheapest way to gain exposure to future consumption in China.
During the last two decades, demographics, policy, and technological gains have laid the foundation for the rise of the Chinese consumer. However, this story has paid out much differently than initially envisioned. Unlike their western counter parts, Chinese consumers have adopted e-commerce at much faster rate. Rates are accelerating exponentially, both in China and abroad, as the COVID-19 pandemic persists.
As a barometer for judging the Chinese consumer, JD’s revenues grew at the strongest rate in 10 quarters and active user accounts have risen by +55 million in 2020. The observed shift in global consumer behavior toward purchasing virtually everything online, including fresh produce, provides additional tailwinds to JD.com’s prospects for scalability. Scale increases the probability of future sustainable earnings. JD’s scale is increasing across their entire supply chain, and with it so are the company’s prospects for sustainable earnings growth.
One of the few encouraging developments provided by the COVID-19 pandemic has been the broad-based adoption of mobile purchases across China. In Q2 2020, 80% of JD’s new user gains in China came from lower-tier cities. As JD.com’s geographic footprint continues to grow, so do the prospects of elevated growth rates persisting further into the future.
As China’s domestic consumption continues to recover from pandemic-induced disruptions, JD is benefiting from pent-up demand and shifts in consumer purchasing behavior toward e-commerce. The company is reaping the rewards of management’s long-term strategy of investing in supply chain technologies and logistical capabilities. Their ownership interest in Dada Nexus Limited (DADA) is a great example of JD’s focus on supply chain integration. Efficiency improvements and volume increases (net revenue grew at 33.8%) helped the company surpass Q2 2020 consensus estimates by $0.15 per share.
In addition to JD.com’s core business, investors also should consider the prospects of the company’s expansion into other sectors. JD has Amazon (AMZN) like qualities, in terms of the number of different business segment verticals they are operating within and building out. I see these additional verticals increasing the probability of future upside surprises, while also serving as a diversifier to JD’s core business earnings.
JD.com recently announced plans to spin-off JD Health and JD Digits. On its own, JD Health is now considered to be the largest pharmaceutical retailer in China’s healthcare industry and is a front runner in the internet healthcare arena. Management expects to raise $1B to $3B from the spin-off, with recent IPO history indicating the high end of the range.
So how does the above translate from a valuation standpoint?
Currently, JD.com is expected to grow earnings at an average annual rate of 49.7% per year over the next five years. This is a superior number for a mega-cap company. I have no interest in single-digit earnings growers.
JD.com looks to be one of the cheapest large-cap growth stocks in the entire market. As you can see from the above graphic, the stock is currently trading at a forward PE Ratio of 5.59, while the market (S&P 500) is trading at just under 22 times 12-month and 17 times five-year forward earnings estimates.
Not only is JD.com trading at a discount to the market (on an estimated five-year forward earnings basis), it’s also trading at a discount to its own anticipated growth rate of 49.7% over the next five years. This shows up in a “less than 1X” PEG ratio of 0.11 – a very attractive ratio for growth and value investors alike.
Lastly, let’s take a look at the chart for JD. I tend to lean heavily on technical analysis when entering and/or exiting positions. A glance at the chart below illustrates the strong performance JD.com has seen since the lows of March and May. The market rewarded Q2 2020 earnings with a significant move after they were announced in mid August. The stock appears to have started a new leg up. I view any weakness in the shares as a buying opportunity heading into Q3 2020 earnings.
I remain “Very Bullish” on JD.com and view it as one of the best growth/value combinations available in any market. We currently hold JD in each of our Gunderson Capital Premier Growth and Ultra Growth portfolios. I have a five-year price target of $168 for the shares and a BSN Ranking of #85.
JD has positioned itself as the volume leader among e-commerce retailers in China and their heavily integrated supply chain will continue to lead to better earnings prospects in the quarters ahead. We also view the additional segment verticals as providing additional growth that has not been fully priced into shares of JD. What a bargain.
Note: All images, unless otherwise noted, show data from the Best Stocks Now database.
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Disclosure: I am/we are long JD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I collaborated with my Gunderson Capital Management colleague, Barry Kyte Jr., CFA, on this article.