JD.com (NASDAQ:JD), the largest direct retailer in China, lost half its market value in 2018 amid concerns about its decelerating growth and rising expenses, along with a rape allegation against founder and CEO Richard Liu.
However, the stock rebounded nearly 70% in 2019 as its revenue growth accelerated again, its profits stabilized, and the charges against Liu were dropped. Looking ahead, I believe JD.com's stock could still surge to new highs in 2020 for six simple reasons.
1. A de-escalation of the trade war
The trade war between the U.S. and China weighed down many Chinese stocks over the past two years. Chinese companies buckled under the pressure as the growth of China's economy decelerated to its slowest pace in nearly three decades.
Yet JD's e-commerce business recently weathered those headwinds with two consecutive quarters of accelerating revenue growth. Moreover, the upcoming "phase one" trade deal between the U.S. and China could further amplify that growth by easing the pressure on the Chinese economy.
2. Its expansion into lower-tier cities
JD's number of annual active customers grew nearly 10% year-over-year to 334.4 million last quarter, marking its strongest growth in four quarters. 70% of those new customers came from China's lower-tier cities. JD's new discount marketplace, Jingxi, also posted robust growth when it launched near the end of the quarter.
JD's expansion into lower-tier cities is offsetting its slower growth in top-tier cities like Beijing and Shanghai. It also contains the growth of Pinduoduo (NASDAQ:PDD), its rapidly growing discount rival, which surpassed JD in total shoppers (but not revenue) last year.
3. The stabilization and possible spin-off of JD Logistics
JD stores its own inventories across a massive network of over 650 warehouses, and fulfills orders via seven fulfillment centers and front distribution centers in 29 cities. That platform can fulfill approximately 90% of JD's orders across China within 24 hours.
That logistics unit was a constant weight on its bottom line in previous years, but its losses narrowed last year thanks to its scale, tighter cost controls, and its decision to offer the service to third-party customers. The network is also increasingly automated, with warehouse robots, autonomous delivery vehicles, and drones.
JD Logistics will likely continue to stabilize throughout 2020, and a recent Reuters report suggests that JD could even spin off the unit in an IPO in the second half of the year to boost its cash flows and improve its operating margin.
4. A lower key person risk
Richard Liu's arrest in 2018 highlighted a serious flaw in JD's management model. Liu holds an 80% voting stake in the company, and an unusual clause stated that the board couldn't make any decisions without Liu's physical presence -- which effectively paralyzed the company during his brief incarceration.
Liu still holds a super-voting stake in JD, but he gradually withdrew from its operations throughout 2019. In May, Liu resigned as the manager of the Jade Palace Hotel in Beijing, which JD acquired for $400 million in February. In July, he resigned as a legal representative for a subsidiary that holds a stake in JD Digital.
In November, Liu resigned as the manager of two of JD's new cloud computing units. Throughout December, he relinquished his top roles at four of JD's healthcare subsidiaries. If Liu continues to step away from the company and lays out a clearer succession plan in 2020, it could reduce the oft-cited "key person risk" to JD's stock and attract new investors.
5. Support from its biggest investors
Tencent will continue to integrate JD's marketplace into WeChat, the most popular messaging app in China, via its in-app mini programs. Walmart, which owns a grocery delivery joint venture with JD, will continue expanding its distribution network. Google will help JD expand overseas by integrating its marketplace with Google Shopping in the U.S. and Europe, and it plans to aid its expansion into Southeast Asia.
Assistance from those tech and retail giants, which all view Alibaba (NYSE:BABA) as a common enemy, could significantly strengthen JD's core business this year.
6. An attractive valuation
JD's troubles in 2018 caused many investors to shun the stock. The stock recovered in 2019, but it still trades at less than one times next year's sales and just 25 times forward earnings -- which are low valuations compared to analysts' forecasts for 19% revenue growth and 38% earnings growth next year.
JD's attractive valuation, along with its other aforementioned tailwinds, indicate that this underappreciated stock could surge to fresh highs in 2020.