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Is Stock a Buy?

By Jeremy Bowman - Jan 26, 2021 at 6:55AM

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The Chinese e-commerce stock has been on fire lately. Is it still worth buying?

The year 2020 was kind to e-commerce stocks, and (JD -1.16%) was no exception.

China's biggest online direct seller finished the year with its stock price up 150%, as revenue and profits jumped and the company capitalized on opportunities in areas like groceries, pharmacy, and telehealth. 

After that strong run, is JD poised for more gains? Let's take a look at where the growth stock stands today to see if it's a buy.

A JD delivery man on a motorbike

Image source: in 2021

JD often draws comparisons to Amazon, and there are a number of similarities between the two. The company operates as both a first-party e-commerce seller and runs a third-party marketplace. Its massive logistics operation has roughly 800 warehouses -- more fulfillment space than Amazon. And it is diversifying into new retail segments like groceries and household products, away from its historical strength in electronics and appliances, again resembling the transition Amazon made from its early days.

Selling fast-moving consumer goods like groceries has an advantage for JD, because it keeps customers locked into the platform through repeated transactions as opposed to one-time purchases of big-ticket items. General merchandise sales rose 35% year over year in the quarter with supermarket sales up 48%, compared to 23% growth in its biggest category, electronics and appliances. That transition is helping drive the growth of JD Plus, the company's loyalty program, which saw membership top 20 million in its most recent quarter.

Additionally, its services businesses, which tend to deliver higher margins at scale -- like its third-party marketplace, advertising, and logistics -- are also growing fast, with services revenue up 42% year over year. Third-party logistics, in particular, saw revenue jump 73% year over year in the third quarter. The company has built out one of China's foremost logistics operations, including highly automated warehouses, self-driving delivery vehicles, and drone delivery, which just got a level of clearance from the Chinese government. Its delivery operations now cover almost every county and district in China, including many hard-to-reach rural areas.  

That growth is paying off on the bottom line as well. Adjusted operating margin improved from 2.2% to 3% in the third quarter, a new record for JD, and operating margin in its retail segment reached 3.9%, also a record.

Looking ahead to 2021, the company should benefit from this momentum as well as the pull-forward effect for online demand for things like groceries. The company is also investing in new businesses like JD Health, its healthcare arm that offers services like telemedicine and family medicine.

The valuation

Chinese stocks tend to trade at discounts to their American counterparts due to regulatory fears about the Chinese government and U.S policy toward China. For instance, shares of JD rival Alibaba (BABA -1.03%) plunged a few weeks ago after the Chinese government announced an antitrust investigation against it, which seemed in part to be retribution for insulting remarks that Founder Jack Ma made at a conference. In fact, Ma was even reported "missing" by some news outlets earlier this month, though he recently reappeared on a videostream, giving Alibaba stock a jolt.

Similarly, Chinese stocks struggled in 2018 in the midst of a trade war with the U.S., and more recently there have been threats to delist Chinese companies from American exchanges if they don't comply with certain oversight rules. That has led JD, along with other Chinese companies, to list their stocks in Hong Kong.

On a trailing basis, JD stock trades at a price-to-earnings ratio of 67.2, but that figure looks a lot more appealing based on 2021 estimates. Analysts expect earnings per share to improve from $1.63 in 2020 to $2.27, giving the company a more reasonable P/E ratio of 42. By comparison, the S&P 500 currently trades at a P/E of 39 on a trailing basis.

Considering that JD is an industry leader in the world's fastest-growing e-commerce and overall retail market, investors shouldn't be deterred by the price tag.

Is it a buy?

While JD does carry certain risks that are particular to China, those seem more than sufficiently priced into the stock. Meanwhile, the company has strong positions in a range of fast-growing businesses, including e-commerce, logistics, and telehealth, which should only be strengthened by the pull-forward effects from the pandemic.

Investors can't expect every year to be a blowout performance like 2020, but considering the company's strong revenue growth, improving margins, and the secular opportunity in China's fast-growing economy, the stock still looks like a strong buy. 

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