Shares of JD.com (JD 1.23%) recently slipped to a 52-week low after the Chinese e-commerce giant posted mixed second quarter numbers. Its revenue rose 31% annually to 122.3 billion RMB ($18.5 billion), beating estimates by $700 million. However, JD's non-GAAP net income fell 51% to 478.1 million RMB ($72.3 million), or 0.33 RMB ($0.05) per ADS -- which missed expectations by a nickel. On a GAAP basis, JD reported a net loss of 2.21 billion RMB ($334 million), compared to a net loss of 287 million RMB ($42 million) in the prior year quarter.
JD.com CEO Richard Liu. Image source: JD.com.
For the third quarter, JD expects its revenue to rise 25%-30% annually, compared to expectations for 31% growth. JD blames the slowdown on softer sales growth following its promotions in June and July, increased seasonality, and tougher comps against the prior year quarter. During the conference call, however, CFO Sidney Huang stated that JD's growth rate had "resumed to a normal pace since the beginning of August."
JD's numbers weren't impressive, but does its stock really deserve to trade at less than one times this year's sales? Let's dig deeper into JD's second quarter report to find out.
The key numbers
The bears often claim that JD will lose the long-term battle against Alibaba's (BABA 0.09%) Tmall, the largest B2C (business-to-consumer) marketplace in China.
After all, online marketplaces rely on economies of scale, and Alibaba already controls 58% of China's e-commerce market, according to eMarketer, while JD controls just 16%. Yet JD's total number of online merchants still rose 31% annually to 170,000 during the quarter, and its active customer accounts grew 21.5% annually to 313.8 million over the past 12 months.
That's why JD's net product revenues rose 29% to 110.5 billion RMB ($16.7 billion), while its net service revenues jumped 51% to 11.8 billion RMB ($1.8 billion) last quarter. Its gross merchandise volume (GMV) rose 30% to 437.4 billion RMB ($63.6 billion).
Image source: JD.com.
Those growth figures, along with the ecosystem support of top investors like Tencent and Walmart, indicate that Alibaba isn't killing JD.
Moreover, JD remains a crucial partner for any company that wants to counter Alibaba. Alphabet's Google recently invested $550 million in JD, SINA and Baidu integrated JD's marketplace and user data into their apps, and Baidu's video streaming platform iQiyi recently launched a joint membership program with JD.
Margins and cash flow
JD's recent losses look ugly, but they're mainly caused by its technology, fulfilment, and logistics investments. Unlike Alibaba's Tmall, which mostly relies on third-party logistics, JD fulfills most of its orders through first-party services. This business model, which is similar to Amazon's marketplace, is a low-margin one, but it enables JD to maintain tighter quality control and customer service standards.
JD's non-GAAP gross margin dipped ten basis points annually to 13.3% during the quarter. However, its marketing expenses rose 29% annually, its tech and content expenses jumped 80%, and its sales, general, and administrative expenses climbed 23%. Those expenses caused its non-GAAP operating margin to drop from 0.6% to 0.1%.
That decline looks alarming, but the non-GAAP operating margin at JD Mall -- which tunes out the noise of some new businesses and non-core investments -- actually rose from 0.8% to 1.1%. This indicates that JD's core marketplace remains strong, and that JD's losses could quickly narrow once it reins in its spending and reaps the rewards of its investments.
JD's autonomous delivery vehicle. Image source: JD.com.
JD also previously spun off its volatile fintech unit, JD Finance, but retained an investment in the company to receive 40% of its future pre-tax profits. During the quarter JD Finance finished another funding round, which valued the company at 130 billion RMB ($18.9 billion); the unit could also generate decent returns of its own in the future.
JD's free cash flow plunged 41% annually to 13.1 billion RMB ($1.99 billion) during the quarter due to its rising expenses. However, its cash and equivalents still rose 37% to 35.2 billion RMB ($5.32 billion), so the company won't face a cash crunch anytime soon.
Should you buy JD.com?
JD's stock will remain out of favor as long as trade tensions weigh down Chinese stocks and investors remain focused on competition from Alibaba or its paper-thin profits. But over the long term, JD's investments and partnerships should pay off. Investors who buy JD as this bargain bin-valuation could be well-rewarded over the long term.
