JD.com Is Still Undervalued, Despite What the Bears Say

JD.com (JD 5.80%), the largest direct retailer in China, recently posted its fourth-quarter earnings. Its revenue rose 31% year over year to 224.3 billion yuan ($34.4 billion), beating analysts' estimates by $710 million.

Its non-GAAP net income surged 194% to 2.4 billion yuan ($0.4 billion), or $0.23 per American depositary share (ADS), which exceeded analysts' expectations by $0.05 a share. On a GAAP basis, which includes some big gains from its investment portfolio, its net income soared 575% to 24.3 billion yuan ($3.7 billion).

JD's headline numbers were impressive, but its shares barely rose after the report. The bears will likely claim a lot of growth was already baked into the stock, which more than doubled in value over the past 12 months, but I believe it's still undervalued and has plenty of room to run.

Image source: JD.com.

Its core business is firing on all cylinders

JD's revenue growth in Q4 marked an acceleration from both its previous and prior-year quarters.

Data source: JD.com. YOY = year over year. RMB terms.

JD's revenue rose 29.3% for the full year, which also surpassed its 24.9% increase in 2019 and 27.5% growth in 2018.

It attributed that acceleration to its ongoing expansion into China's lower-tier cities, the growth of its "Prime-like" JD Plus subscription service, its omnichannel push into brick-and-mortar stores, and the increasing popularity of big annual sales events like its 618 Shopping Festival in June.

JD also posted strong sales of electronics and home appliances throughout the year, while robust demand for healthcare, cosmetics, and home products continued to drive the growth of its FMCG (fast-moving consumer goods) category. Its online supermarket business also continues to expand.

A growing base of higher-spending customers

JD's number of annual active customers rose 30.3% year over year to 471.9 million in Q4, marking its second straight quarter of more than 30% year-over-year growth in customers.

Data source: JD.com. YOY = year over year.

More than 80% of JD's new customers in the fourth quarter came from China's lower-tier cities. Expanding into lower-income markets can throttle a retailer's margins, but JD Retail's adjusted operating margin still expanded 10 basis points year over year to 1.6% during Q4.

JD also revealed that its average revenue per user had risen more than fivefold between 2015 and 2020. Those robust growth rates indicate there's still plenty of room for JD and its two main rivals, Alibaba (BABA 2.33%) and Pinduoduo (PDD 9.38%), to expand without trampling each other.

The expansion of its services segment

JD's services segment -- which mainly sells ads across its marketplace and provides its logistics services to external customers -- generated 42% revenue growth in 2020. That higher-margin segment accounted for 12.6% of its top line during the year, up from 11.5% in 2019.

JD CEO Richard Liu. Image source: JD.com.

The expansion of that business, along with JD Retail's stable operating margins and its robust revenue growth, boosted JD's adjusted operating margin 13 basis points year over year to 0.5% in the fourth quarter and 60 basis points to 2.1% for the full year.

Those margins might seem slim, but investors should remember that JD takes on inventories and fulfills all its orders with its own logistics network. Alibaba's primary marketplaces and Pinduoduo are mainly listing platforms that don't take on any inventories.

JD's business model is more capital intensive, but it shields shoppers from counterfeit and low-quality products. JD racked up losses for years to expand that network, but it's now reaping the rewards as its rivals continue to struggle with unscrupulous third-party merchants.

Other companies are now paying JD to use its logistics network, which is boosting the segment's margins. JD plans to spin off JD Logistics in a Hong Kong listing in the near future, but it will likely retain a majority stake in this growing subsidiary.

JD is still expanding its services segment with smaller platforms like JD Health, which was also spun off in an IPO last December, and JD Digits, its fintech arm that recently absorbed its smaller cloud and AI segments. In short, JD is planting the seeds to evolve from a direct retailer into a diversified tech giant over the next few years.

The outlook and valuations

JD didn't provide any precise guidance for 2021. But during the conference call, CFO Sandy Xu said JD expected "to maintain the growth momentum that we generated in 2020 on multiple fronts in 2021, in spite of continued macro challenges and the high comparable base impact."

Analysts expect JD's revenue to rise 37% in 2021. That's a high growth rate for a stock that trades at just 29 times forward earnings and less than one time this year's sales.

Simply put, the market still values JD as a traditional retailer when it's clearly an expanding e-commerce and tech behemoth. That's why the stock is still undervalued, no matter what the naysayers might say.