Please ensure Javascript is enabled for purposes of website accessibility

Will JD.com’s $2 Billion Buyback Plan Hold the Bears at Bay?

By Leo Sun - Mar 18, 2020 at 12:40PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The e-commerce giant approves another buyback plan -- but don’t assume that it will actually buy back any shares.

JD.com's (JD -0.97%) stock recently popped after the Chinese retailer approved a fresh $2 billion buyback plan, which will last for the next 24 months.

That approval, along with plans for a second stock listing in Hong Kong, suggest that JD sees upside potential in its shares. But will a big buyback counter the coronavirus crisis-induced sell-off and hold the bears at bay?

What does a $2 billion buyback plan mean for JD?

JD ended last quarter with 64.5 billion yuan ($9.3 billion) in cash, cash equivalents, restricted cash, and short-term investments. It plans to fund the entire buyback from its free cash flow, which hit 19.5 billion yuan ($2.8 billion) in 2019.

An autonomous JD delivery vehicle.

Image source: JD.com.

JD currently has a market cap of $65 billion, so a $2 billion buyback would only reduce its share count by about 3%. Investors should also note JD only approved the plan -- which doesn't obligate it to actually buy back any shares.

JD previously approved a $1 billion buyback plan, which lasted for 12 months, in December 2018. It spent $30 million buying back 1.4 million shares at an average price of $21.48 later that month. However, JD didn't disclose any additional buybacks throughout fiscal 2019 before the plan expired.

In fact, JD's total number of outstanding shares rose 3% (1% on a non-GAAP basis) throughout 2019. JD didn't aggressively repurchase shares as its stock rallied nearly 40% over the past 12 months, which suggests the buyback announcement was aimed at calming investors after founder and CEO Richard Liu was hit with a rape allegation in 2018.

In short, investors shouldn't expect JD to spend anything close to $2 billion on buybacks over the next two years. But if JD's stock stumbles along with the broader markets, the company might opportunistically accumulate and cancel out some shares.

With or without buybacks, JD is still a value stock

JD would still be a solid investment without any billion dollar buybacks. Its annual active customers grew 18.6% annually to 362 million last quarter, marking its strongest quarterly growth in three years, and 70% of its new customers came from lower-tier cities. It revenue growth also remained robust over the past year.

YOY growth

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Annual active customers

4.4%

2.9%

2.4%

9.6%

18.6%

Revenue*

22.4%

20.9%

22.9%

28.7%

26.6%

YOY = Year-over-year. *RMB terms. Source: JD quarterly reports.

JD expects its revenue to rise "at least" 10% in the first quarter, even as citywide lockdowns and quarantines disrupted its supply chain and logistics network. Its operating margin also expanded annually as economies of scale kicked in for its massive logistics network -- which also generates extra revenue by serving other companies.

JD's growth defies the bearish claims that it will fall behind Alibaba (BABA -2.02%) and Pinduoduo (PDD -2.01%) in China's crowded e-commerce market. Alibaba recently warned that its core commerce revenue would decline in the current quarter, while Pinduoduo remains heavily dependent on margin-crushing subsidies.

JD's stock still trades at less than one times its annual revenue after its rally over the past year. That's an absurd valuation, especially when we consider that China's COVID-19 infection rate is slowing down as businesses come back online.

Plenty of room for growth

During last quarter's conference call, CFO Sidney Huang stated that JD would resume its "robust growth momentum" and "improving margin trend" after the outbreak ends.

JD should take advantage of the market downturn and buy back some shares, but it remains an undervalued growth stock either way. The buyback plan won't hold all the bears at bay, but that safeguard could make it a less attractive target for short sellers.

 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

JD.com, Inc. Stock Quote
JD.com, Inc.
JD
$64.22 (-0.97%) $0.63
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$113.68 (-2.02%) $-2.35
Pinduoduo Stock Quote
Pinduoduo
PDD
$61.80 (-2.01%) $-1.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
317%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.