JD.com (NASDAQ:JD), a leading e-commerce company in China, is on a winning streak in the year 2020. After clocking a 34% year-over-year revenue growth rate in the last quarter, it continues to deliver a solid 29% growth in the latest quarter on the back of strong user growth.
But strong revenue growth is just one part of the overall story. Let's explore a few important highlights that investors should take away from the latest earnings report, released last week.
Solid performance across the board
The COVID-19 pandemic has affected almost every business globally, leaving all but a few industries worse off in the year 2020. The e-commerce industry is one of the few that has benefited from the crisis, and that's evident in JD.com's third-quarter 2020 result.
The technology giant grew revenue across the board, with product revenue increasing by 27% to 151 billion yuan, while service revenue surged 43% to 23 billion yuan. The latter is now contributing 13% (a historical record) to JD's total revenue, an important development since it further diversifies the company's revenue away from just selling physical products.
On top of that, JD has also generated strong free cash flow for the quarter of 7.5 billion yuan (63 million yuan in the corresponding quarter last year), netting it 126.7 billion yuan in cash and cash equivalents, restricted cash, and short-term investments.
In short, not only did JD continue to grow at a breathtaking rate, but it's also generating an enormous amount of cash, which can be reinvested into the business to sustain its future growth.
Retail business continued to strengthen
Already the largest retailer in China (in terms of revenue), JD continued to improve its e-commerce operations during the quarter.
The first highlight here is the record-high margin of 3.9% achieved in the quarter, up 56 basis points from last year. Next, JD retail reduced inventory days -- the number of days a business needs to sell its inventory -- to 34.3. That's a record of its own, and also one of the lowest among global retailers. Both metrics improved on the back of a greater economy of scale and could continue to do so as the business grows further.
Besides, JD retail grew its paid members (under JD Plus) to more than 20 million in October, which is about 5% of its annual active customers. According to management, these paid members tend to shop more and have a better retention rate than typical members. Given the importance of these members to JD's future growth, investors should watch for this indicator in the future.
The proposed listing of JD's investees
In addition to being an e-commerce operator, JD has a good record of incubating and growing new ventures beyond its e-commerce root, such as JD Digit (fintech), JD Logistics, and JD Health. These new ventures are critical since they help fuel JD's growth -- for perspective, these new businesses grew revenue at 86% year over year in the recent quarter, much higher than the companywide growth rate of 29%.
In the earnings release, JD announced that JD Health had submitted its proposal to list on the Hong Kong exchange. Earlier, JD Digit also proposed to list itself on Shanghai's Star Market. As these subsidiaries go public, investors will have more information about them, which will help them evaluate these businesses. Doing so may help boost JD's stock price since investors can now attribute the appropriate valuation of these companies to JD.
JD grew both revenue and profit in the quarter, a sign that the business has reached critical mass and is no longer sacrificing profitability for growth.
As it scales its various business segments further, JD.com appears to have the tools in place to sustain its current growth trajectory for the foreseeable future. More importantly, it also appears to be accelerating its profitability improvement thanks to operating leverage.
Having said that, I will not rush into buying JD's stock today, especially since it has almost tripled in value in the last 12 months -- meaning most of the positive news has likely been priced in. It's best that investors wait for a better entry point (say during a market correction) to invest in the stock.