Investors in JD.Com Inc (NASDAQ: JD), known as the Amazon.com of China, had a fruitful 2019, with strong financial performance and accelerating revenue growth in the second and third quarters driving shares up 40% for the year. This positive streak continued as JD beat expected revenue by more than $600 million and swung a net loss to net profit in its latest earnings release earlier this month. Here, we will look at three major takeaways that investors should note from its earnings report.
Image source: JD.com.
1. Solid growth
One of the main concerns about JD.com is whether it can sustain high growth over the long term, which has declined materially from the early days. See below:
SOURCE: JD.COM INVESTOR PRESENTATION
From a high of 50% between 2012 and 2018, revenue growth hit a low of 21% in the first quarter of 2019, before recovering in the second and third quarter of 2019.
Thankfully, JD.com reported some solid numbers this quarter that should relieve such concerns. Net revenue came in 27% higher year over year, thanks to higher product and service revenue. Annual active customers increased by 18.6% to 362 million in 2019, while mobile monthly active users increased by 41% over last year.
In his remarks, chairman and CEO Richard Liu highlighted the strong customer growth in China's smaller cities. This is comforting since it implies that there is a demand for the company's products in these markets; traditionally, JD has focused its business mainly in big cities like Beijing and Shanghai. Its early success in these markets opens up new opportunities for JD to grow its business in the future.
2. Strong performance in retail
One important strategy that JD.com has been employing to grow its retail e-commerce business is to delight its customers by offering low prices. This strategy has worked for the likes of Amazon and Costco, and so far, it has proven an effective way for JD to grow its business. The downside to this strategy, however, is that JD has had to operate at a low or even negative margin for an extended period. Skeptics opined that it would be difficult for JD.com to deliver sustainable profits over time, considering how competitive this industry is in China.
Nevertheless, JD proved the skeptics wrong in the latest quarter by delivering a positive operating margin of 1.4% for the retail business, up from 1.1% in the corresponding period in 2018 . The operating margin for the full year of 2019 came in even stronger, up from 1.6% in 2018 to 2.5% owing to improved economies of scale. The improvement in operating margin bodes well for the company's long-term goal to grow its profit margin to the high single digits.
3. COVID-19
The COVID-19 outbreak that took place in China since the beginning of the year has disrupted the daily lives of local Chinese. To combat the spread of the virus, the Chinese government locked down Hubei Province, restricted the movement of residents throughout the country, and closed down public transportation, factories, and businesses across the country. So far, these decisions seem to be correct; the number of new cases reported in China each day dropped from more than 10,000 at its peak to around 20 lately. But for Chinese companies, these restrictions had severe financial and operational consequences on their business.
While JD also faced disruption, the resilience of its business model quickly came into the limelight during the outbreak. For example, it was able to quickly resume its operations after the Chinese New Year to fulfill orders from its customers when other online platforms struggled to do so, thanks to its proprietary logistics arm. Thus, while it reported lower sales in large-ticket durable goods and discretionary products during the virus outbreak, JD.com still benefited from increased orders for necessities such as groceries, fresh produce, and healthcare products. Though these types of orders might not be very profitable, they do help to enhance JD.com's brand among Chinese consumers.
Going forward, JD.com expects the outbreak to hurt its business in the first quarter of 2020. Still, it foresees it least 10% revenue growth in that period. To me, it's a strong indication of the strength of its business model that it could still grow during such a difficult time.
Brighter times ahead?
JD.com went through a challenging period from 2018 to early 2019, with revenue growth slowing down and margins contracting. Yet its recent performance (including the second and third quarter of 2019) suggests that the worst may finally be over for the company.
For investors who have been staying on the sideline in the last few quarters, now is a good time to give it a second look.
