Shares of JD.com (JD 0.82%) recently surged after the Chinese online retailer posted its fourth-quarter earnings. Its revenue rose 22% annually to 134.8 billion RMB ($19.6 billion), beating estimates by $210 million.
JD's non-GAAP net income rose 67% to 749.9 million RMB ($109.1 million), or $0.07 per ADS, which also topped estimates by $0.12. On a GAAP basis, its net loss widened from 0.9 billion RMB a year ago to 4.8 billion RMB ($0.7 billion), or $0.40 per ADS.
JD.com CEO Richard Liu. Image source: JD.com.
JD expects its revenue to rise 18%-22% annually in the first quarter, which matches Wall Street's expectations. It didn't offer any bottom line guidance, but analysts expect its non-GAAP earnings to improve 30%. Does JD's guidance indicate that the stock -- which lost nearly 40% of its value over the past 12 months -- is finally ready to rebound?
Breaking down the key numbers
Over the past year, investors were concerned about the ongoing slowdown in JD's annual growth in GMV (gross merchandise volume), active customers, and revenue. All three growth metrics decelerated again during the fourth quarter, but JD's revenue forecast for the first quarter indicates that its growth could be stabilizing:
|
Metric |
Q4 2017 |
Q1 2018 |
Q2 2018 |
Q3 2018 |
Q4 2018 |
|---|---|---|---|---|---|
|
GMV* |
33.1% |
30.4% |
30.5% |
30.5% |
27.5% |
|
Active customers |
29.1% |
27.6% |
21.5% |
14.6% |
4.4% |
|
Revenue* |
38.7% |
33.1% |
31.2% |
25.1% |
22.4% |
Year-over-year growth. *RMB terms. Source: JD quarterly reports.
However, JD has been diversifying its business away from its core marketplace by offering its logistics services to other retailers like the Japanese e-commerce giant Rakuten (RKUNY 3.29%). It's also selling more ads across its marketplace. Revenue from those higher-margin services rose 50% annually in 2018 and accounted for 10% of its revenue, up from 8% in 2017.
Image source: JD.
But what about the margins?
JD's top line growth is stabilizing, and its slim margins are improving. Its non-GAAP operating margin came in at 0.2% for the quarter, compared to a negative operating margin a year ago. Its non-GAAP operating margin at JD Mall, its core marketplace business, rose 50 basis points annually to 1.1%.
Those margins are weighed down by JD's ongoing investments in its e-commerce platform and logistics services. Its total operating expenses rose 21% annually during the quarter, but didn't outpace its revenue growth rate. Its spending also decelerated on a year-over-year basis across all of its expense categories outside of marketing:
|
Year-over-year change: |
Q3 2018 |
Q4 2018 |
|---|---|---|
|
Cost of revenues |
25% |
21% |
|
Fulfillment |
22% |
11% |
|
Marketing |
25% |
34% |
|
Technology and Content |
96% |
70% |
|
General and Administrative |
33% |
17% |
JD's operating expenses. Source: JD quarterly reports.
JD's margins are still paper thin, but the expansion of its services ecosystem and a gradual reduction in ts tech, content, and fulfillment expenses could stabilize its earnings growth.
Other irons in the fire
JD's marketplaces have less than half as many annual active customers as Alibaba's (BABA 1.03%) marketplaces, but it still has plenty of irons in the fire.
It launched Mini Programs on Tencent's (TCEHY +0.26%) WeChat last year, and it's deepening its ties with Walmart (WMT +0.72%) with delivery services from brick-and-mortar stores. Tencent and Walmart are two of JD's biggest investors.
JD is also expanding its Prime-like "JD Plus" subscription program, which locks in customers with discounts, curated products, VIP customer service, and access to premium digital content from partners like iQiyi. It's also expanding its presence in higher-growth overseas markets like Southeast Asia and Russia. All these initiatives should widen JD's moat against Alibaba.
Check out all our earnings call transcripts.
Do the risks outweigh the rewards?
JD's business is stabilizing, its profitability is improving, and its stock looks cheap at less than one times this year's sales. It also launched a $1 billion buyback plan last December. Its cash and equivalents, boosted by its investments, also rose 33% annually to 34.3 billion RMB ($5 billion) even as its free cash flow remained in negative territory.
I don't expect JD to rebound to $40 anytime soon. However, I think its downside is limited at these levels, and it could rally much higher if trade tensions between the U.S. and China wane and the Chinese economy stabilizes.
