JD.com (JD 2.04%), China's biggest retailer by revenue, is riding high -- and for good reason.
Shares are near record levels, buoyed by JD's stellar growth in the first nine months of 2020. Revenue and net profit rose 28% and 200%, respectively, as stay-at-home shoppers bought more online goods and as JD grew its services business, which includes logistics services for third-party customers.
That's pretty impressive, especially when you consider these factors: we're living in a global recession due to COVID-19, and there's an ongoing U.S.-China trade war that's shown no signs of stopping. For investors, the question is: What's next? Can JD sustain its strong growth trajectory into 2021?
The indications are that JD is just getting started. Here are two reasons why JD.com looks set for another good year.
1. JD.com is growing its paid membership subscription
JD's e-commerce business fired on all cylinders in 2020, posting year-on-year improvements in revenue, operating profits, and margins.
Of special note was the strong performance of JD Plus, the Amazon (AMZN 4.44%) Prime-like membership program that ties members with shopping rebates, free shipping, and deals from over 600 partners including China Telecom, iQiyi, and Tencent's QQ Music. As of October 2020, JD Plus had over 20 million members, up 33% from a year ago.
JD Plus is an important driver of JD's growth. Generally speaking, shoppers on a membership program are more loyal and spend more, encouraged by special privileges like rebates, free shipping, and other perks. As spending rises, JD gets more leverage to negotiate better prices from suppliers. It can then share these savings with JD Plus members, which leads to even more purchases -- continuing the virtuous cycle.
As we know, Amazon has used Amazon Prime beautifully to scale its business. A 2015 study by Business Insider Intelligence found about 40% of Prime members spent more than $200 on Amazon over a 90-day period, compared to 13% of non-Prime customers.
Today, JD is getting the same results from JD Plus. During JD's last earnings call, CFO Sandy Xu said JD Plus's average revenue per user was multiple times higher than that of non-Plus members. Through JD Plus, JD is building a sticky customer base. That will be very handy as the company defends and grows its market share against rivals like Alibaba or Pinduoduo.
With less than 5% of its 442 million active buyers as paid members, JD has plenty of room to grow this part of its business in 2021.
2. JD.com is growing its younger businesses
JD is well-known for its e-commerce business. But what's equally impressive is its ability to start, build, and scale new businesses. Collectively, JD's non-e-commerce businesses grew revenue by 86% in the third quarter of 2020, outpacing the company's overall growth rate of 29%.
Among these businesses, three -- JD Digits, JD Logistics, and JD Health -- have reached the necessary scale to operate as stand-alone businesses.
JD Digits has grown into one of China's major fintech players, providing services such as financing and payment solutions. It looks well-positioned to grow, leveraging JD's e-commerce ecosystem to provide financial services to consumers and small businesses.
Similarly, JD Logistics is riding on the growth of JD's e-commerce business. It also provides logistics solutions for other companies -- a segment that accounts for half of the business -- giving the company another engine for growth.
JD Health, which provides online healthcare services and health products, went public last month in Hong Kong's biggest IPO of 2020. Investors seem to love it, with stock for JD Health up 107% from its IPO price.
And if its financials are anything to go by -- revenue grew 77% year over year to 13.2 billion yuan in the first three quarters of 2020 -- customers seem to love JD Health's wide-ranging, affordable selection of pharmaceutical and healthcare products. They've also embraced the company's online services, such as telemedicine, which are widening access to quality healthcare in China, tackling a national shortage of doctors. As a result, it had 80 million users as of Sept. 30, 2020, nearly twice as much as it had in 2017.
Put together, these younger businesses will continue to drive JD's growth in 2021.
What this means for investors
After years of capital-intensive growth, JD has reached a stage where it's generating substantial amounts of cash flow. JD's free cash flow was 19.5 billion yuan in 2019 and 30.2 billion yuan for the trailing 12 months ended Sept. 30, 2020.
As JD expands its e-commerce business from here, it will benefit from improved operating leverage. This will help JD at least maintain its cash flow levels, if not grow them further. Still, none of this means that JD is slowing down, at least not in the near term. Its e-commerce business is still growing nicely, and newer businesses are expanding at a breathtaking rate.
Looking for a growth stock? JD might be an interesting place to start.