Shares of JD.com (JD +1.36%) recently tumbled 8% to a multiyear low after the company posted mixed third-quarter results. Its revenue rose 25% annually to 104.8 billion RMB ($15.3 billion), which narrowly missed estimates. On a U.S. dollar basis, its revenue rose 21%.
JD's non-GAAP net income fell 45% to 1.2 billion RMB ($0.2 billion), or $0.12 per ADS, but still beat expectations by two cents. On a GAAP basis, which includes its gains from Farfetch's IPO, JD's net income tripled to 3.0 billion RMB ($0.4 million), or $0.30 per ADS.
Image source: JD.com.
For the fourth quarter, JD expects its revenue to rise 18% to 22.5% annually in RMB terms, which missed the consensus forecast for 23.4% growth. JD didn't offer any earnings guidance, but analysts expect a 25% decline on a non-GAAP basis. For the full year, analysts expect JD's revenue to rise 29%, but for its earnings to fall 38%.
Those numbers look disappointing, but JD is still the second-largest e-commerce company in China by GMV (gross merchandise volume) and its largest retailer by annual revenue, so it won't become obsolete anytime soon. Its stock also trades at less than 0.5 times this year's sales. But can JD stabilize its business, start growing again, and win back investors? Let's dig deeper into its third-quarter report to find out.
The key growth figures
JD's annual growth in GMV, customers, and revenue clearly decelerated over the past year, and its guidance suggests that slowdown won't end anytime soon.
| Metric |
Q4 2017 |
Q1 2018 |
Q2 2018 |
Q3 2018 |
|---|---|---|---|---|
|
GMV* |
33.1% |
30.4% |
30.5% |
30.5% |
|
Active customers |
29.1% |
27.6% |
21.5% |
14.6% |
|
Revenue* |
38.7% |
33.1% |
31.2% |
25.1% |
Percents are year-over-year growth. *RMB terms. Source: JD quarterly reports.
During the conference call, CFO Sidney Huang attributed the slowdown to slower sales of "large ticket electronics and appliances," which was partly offset by its "strong momentum" in general merchandise sales. Huang also attributed the stabilization of its GMV growth to "improving marketplace operations."
JD's margins dipped across the board. Its non-GAAP gross margin dropped 10 basis points annually to 15.2%, while its operating margin (before unallocated items) at its core JD Mall business fell 10 basis points to 2.2%. Its non-GAAP operating margin came in at just 0.6%, compared to 1.8% a year earlier, due to its rising expenses:
| Metric |
YOY change |
% of total revenues |
|---|---|---|
|
Cost of revenues |
25% |
85% |
|
Fulfillment |
22% |
7% |
|
Marketing |
25% |
4% |
|
Technology and Content |
96% |
3% |
|
General and Administrative |
33% |
1% |
JD.com Q3 operating expenses. Source: JD Q3 report.
The big jump in technology and content expenses was attributed to the ongoing expansion of JD's marketplace and digital services. Huang stated that those investments were "critical" for JD's "next phase of growth," but noted that its R&D expenses should "stabilize" over the next few quarters.
Identifying the long-term catalysts
JD realizes that it needs to lock in customers, expand its margins, and stabilize its profitability as its top-line growth decelerates.
Image source: JD.com.
That's why it offers a "JD Plus" program that gives subscribers discounts, curated products, VIP customer service, and access to premium digital content from partners like iQiyi. The service now reaches over 10 million subscribers, and it still has room to grow across JD's active customer base of 305 million.
It also launched "mini stores" on Tencent's (TCEHY +1.11%) WeChat, the top mobile messaging app in China, and it integrates its marketplace with Walmart (WMT +0.99%) for online shopping and fresh grocery deliveries from brick-and-mortar stores. Tencent and Walmart are notably two of JD's biggest stakeholders. JD is also selling online ads and offering its JD Logistics services to other retailers.
JD's revenue from all these higher margin services rose 49% annually and accounted for over 10% of its top line during the quarter. The continued growth of its services revenue could offset its slower growth and lower margins at JD Mall, lock in more customers, and boost its overall profitability.
Can JD.com make a comeback?
JD.com will become a compelling buy if its revenue growth stabilizes, its services revenue keeps growing, trade tensions wane, the RMB appreciates, and CEO Richard Liu is cleared of a rape allegation that he has denied. That could all happen over the next few quarters. But until that happens, JD's stock will remain stuck in neutral as investors fret over those near-term headwinds.
