JD.com (NASDAQ:JD) is back on track.

The Chinese  e-commerce giant posted strong growth in the third quarter, with revenue up 28.7% to $18.9 billion, easily beating analysts' consensus estimate of $18.13 billion. Even better, profit margins ramped up as the company's revenue from logistics nearly doubled in the period. It continues to benefit its earlier investments in infrastructure to grow its higher-margin services business. 

Adjusted operating income of $416 million for the quarter was more than four and a half times the result from a year prior as the company leveraged fulfillment, marketing, and technology expenses. Adjusted earnings per share jumped from $0.12 to $0.29, well ahead of the consensus expectation of $0.17 per share.

A JD delivery worker on a motorbike

Image source: JD.com.

After a strong performance during China's Singles Day shopping holiday in early November, during which transaction volume grew 27.9% year over year,  JD.com forecast year-over-year revenue growth of 21% to 25% for the fourth quarter, again better than the analysts' consensus of 15.2%, and a sign that the market is still underestimating the company. 

JD.com shares are now up 61% so far this year. Concerns around CEO Richard Liu's arrest last year in Minnesota on rape allegations have faded as authorities there declined to file charges against him, and investors have put their fears behind them about how the U.S.-China trade war and China's slowing economic growth will impact the company. Meanwhile, JD.com continues to earn its reputation as the "Amazon (NASDAQ:AMZN) of China" with a logistics network that can now deliver about 90% of direct sales orders within 24 hours, matching Amazon's one-day Prime delivery service. It has even carved out a foothold in healthcare: JD Pharmacy is now the largest online pharmacy by revenue in China.

The company's Amazon-like growth potential was well summed up by CFO Sidney Huang, who said on the earnings call: 

"The higher sales we achieved will give us further economies of scale, in both procurement and operating efficiency, which will afford our customers even more pricing benefits, setting an even higher bar for competitors, while driving our further growth and margin expansion next year. This is the beauty of our 1P [first-party] business model, a self-reinforcing virtuous cycle. And it has worked extremely well for all the No. 1 party retailers either by country or by category around the world.

You have to be No. 1 to enjoy this virtuous cycle and you have to have a lower cost structure than everyone else. JD.com is No. 1 in China and [indiscernible] and the snowball is just beginning to roll."

Huang is laying out how JD.com's size, scale, and growth give it many of the same competitive advantages that Amazon has: It can leverage those into lower prices and profits, creating a flywheel effect in which lower prices attract more customers to its ecosystem, further expanding its economies of scale and allowing the cycle to repeat again and again.

The power of logistics

JD's logistics' prowess is at the heart of its business model and gives it a competitive advantage over rivals like Alibaba and Pinduoduo, which haven't invested as heavily in infrastructure and hard assets.  The company now has more than 650 warehouses around China and is starting to see third-party business accelerate -- external revenue accounted for 40% of logistics revenue in the quarter. 

Management warned that margins could temporarily come down as the company continues its expansion into China's lower-tier cities, but asserted that they would recover after a short period once it gains leverage from better capacity utilization and staff productivity. In the third quarter, those economies of scale helped drive down fulfillment expenses from 7.4% to 6.5%.

Amazon has seen its profits in North American e-commerce grow as a greater share of its sales come from its marketplace and as the investments in its warehouse and logistics network pay off, and JD.com is starting to see similar benefits. JD Retail hit a record operating margin of 3.3% in the quarter, and the company also posted an all-time high adjusted operating margin of 2.2%.

Even after the stock's run-up this year, JD.com shares still look affordable at a price-to-earnings ratio of 33, especially considering the company's long-term growth potential. Despite some evidence of slowing economic growth in China and trade war headwinds, it continues to deliver consistent sales growth. Expect JD.com stock to move higher over the long term.