Shares of JD.com (JD 2.04%) recently tumbled to a new 52-week low after CEO Richard Liu was arrested in Minneapolis on allegations of sexual assault. No charges were filed against Liu, who was released without bail and allowed to return to China.
Liu's lawyers said that there was "no credible complaint," and didn't expect him to be charged. Nonetheless, the negative headlines could still dent JD's reputation among its shoppers, investors, and business partners. Can the e-commerce giant bounce back from this scandal, or will Liu's tarnished reputation remain a long-term risk?
What hurts Liu hurts JD.com
Richard Liu founded JD in 1998 as a manufacturer of computer components. In 2004 JD launched its B2C (business-to-consumer) online marketplace, which was initially called Jdlaser.com, then 360buy.com, and finally JD.com.
Liu has been JD.com's only CEO throughout its 20-year history, so his departure would be akin to Amazon losing Jeff Bezos or Alibaba (BABA 2.78%) losing Jack Ma. Liu only owns 15% of JD.com's shares, but retains an 80% voting stake through his super-voting shares.
Liu also must be present at board meetings for executive decisions to be made. In other words, there's no way JD's investors or the board can fire Liu. It could also be argued that removing Liu, who built JD from the ground up, would hurt the company more than these negative headlines.
Richard Liu and Jack Ma are both high-profile celebrity CEOs in China. But unlike Ma, Liu attaches his name to his brand -- the second character in Jing Dong (JD) is derived from the last character of his Chinese name, Liu Qiang Dong. That leaves JD exposed to the same brand risk that hurt casino giant Wynn Resorts when its founder and CEO Steve Wynn was hit by sexual misconduct allegations.
That's why Stifel analyst Scott Devitt recently cited a "key-person risk" for JD.com when he reduced his price target from $48 to $39. However, no major analyst has issued a "sell" rating on JD.com yet.
Another day, another headache for JD.com
Liu's arrest comes at a tough time for JD, which is struggling with decelerating sales growth, surging costs, and widening losses.
Last quarter JD's revenue rose 31% annually to 122.3 billion RMB ($18.5 billion), but it expects just 25% to 30% sales growth for the current quarter. The company blamed that slowdown on softer sales growth following its June and July promotions, increased seasonal headwinds, and tougher comparisons to the prior year quarter.
Unlike Alibaba, which relies heavily on third-party logistics services, JD mainly uses its own logistics network, JD Logistics. JD also takes possession of most of the products that are sold on its marketplace before shipping them out from its fulfillment centers -- which ensures better tracking and quality control, but incurs higher operating expenses. That's why there's such a big gap between Alibaba and JD's operating margins.
JD believes that these investments will eventually pay off as it automates more warehouses and delivery services. It also plans to monetize JD Logistics by offering its services to other companies. JD also has plenty of allies -- including Tencent, Walmart, and Alphabet's Google -- that want to help it counter Alibaba's growth.
But for now JD's losses look ugly. It reported a GAAP loss of 2.21 billion RMB ($334 million) last quarter, compared to a loss of 287 million RMB a year earlier. On a non-GAAP basis, its net income plunged 51% annually to 478.1 million RMB ($72.3 million), and its free cash flow declined 41% to 13.1 billion RMB ($1.99 billion).
Maintaining a long-term view
It's easy to lose sight of the forest for the trees when negative headlines crush a stock. However, investors should observe that at $26, JD trades at 0.6 times this year's sales and 0.4 times next year's sales.
These are fire sale valuations for a company that is expected to generate 30% sales growth this year and 25% growth next year. Alibaba, for comparison, trades at about 7 times this year's sales and 5 times next year's sales. Therefore, investors who think that JD can weather the negative PR should consider this dip to be an incredible long-term buying opportunity.