Is JD.com Stock a Buy?

JD.com (JD 0.20%), the largest direct retailer in China, recently posted first-quarter numbers that beat analysts' expectations. Its revenue rose 39% year-over-year to 203.2 billion yuan ($31 billion), beating estimates by $1 billion and accelerating from both the previous and prior-year quarters.

Its net income more than tripled to 3.6 billion yuan ($560 million). On a non-GAAP basis, its net income increased 33% to 4.0 billion yuan ($$620 million), or $0.38 per ADS -- which beat estimates by three cents. Its adjusted EBITDA grew 9% to 4.9 billion yuan ($760 million).

Image source: Getty Images.

JD's growth rates were impressive, but the stock barely budged after the report, and remains down about 20% for the year. Let's see why the bulls aren't enthusiastic about JD's near-term prospects, and whether or not the stock is still a good long-term investment.

JD Retail is still firing on all cylinders

JD's quarterly revenue grew at its fastest rate in over three years. Its number of annual active customers increased 29% year-over-year to 499.8 million, which represented a slight deceleration from the fourth quarter but a significant acceleration from a year ago.

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

JD attributed its customer growth to its ongoing expansion into China's lower-tier cities, which accounted for over 80% of its new shoppers over the past 12 months. Its smaller third-party marketplace, which is comparable to Alibaba's (BABA 0.28%) Tmall, also grew at a faster rate than its main first-party marketplace.

During the conference call, JD Retail CEO Lei Xu said its marketplace benefited from an "all-around improvement in terms of existing and new users retention rates, shopping frequency, purchases, and a wider range of product categories, as well as average spending per user."

In other words, JD's core retail business, which generated 91% of its revenue during the quarter, is still firing on all cylinders. The segment's adjusted operating margin also expanded year-over-year, from 3.7% to 4%, as its fulfilled gross margin improved and it leveraged its tech and logistics upgrades to reduce its operating costs.

Its smaller businesses continue to grow

JD Logistics (JDL) -- which fulfills orders for JD's first-party marketplace, third-party merchants, and external customers with over 1,000 warehouses -- represents the heart of those infrastructure upgrades.

JDL's revenue surged 64% year-over-year during the first quarter and accounted for 11% of JD's top line. Its operating loss widened, due to more aggressive investments, but JD plans to spin off the subsidiary in a Hong Kong IPO in late May. JD will retain a majority stake in JDL, but the logistics company should become more self-sufficient after its IPO and reduce some of its pressure on JD's bottom line.

JD's "new businesses" revenue increased 56% year-over-year and accounted for 3% of JD's top line. These smaller businesses include Jingxi, its group-purchase app, which competes against Pinduoduo (PDD -0.18%); JD Cloud; its online healthcare platform JD Health; and its AI services.

JD's smaller businesses are still growing, and could continue to expand its ecosystem to challenge Alibaba. Investors should note that JD's three core businesses (Retail, JDL, and its new businesses) temporarily generate over 100% of its total revenue due to intersegment eliminations.

Plenty of growth potential, but a lot of near-term headwinds

JD didn't offer any guidance, but analysts expect its revenue and adjusted earnings to increase 26% and 13%, respectively, for the full year. Those growth rates indicate the stock is still reasonably valued at 27 times forward earnings.

Unfortunately, three near-term challenges could discourage investors from buying the stock. First, rising bond yields, inflation fears, and a focus on reopening plays are sparking a rotation from growth to value stocks.

Second, regulators in China and the U.S. have been squeezing Chinese tech companies. China's antitrust regulators are scrutinizing their business strategies, while U.S. regulators plan to delist U.S.-listed shares of Chinese companies if they don't comply with tighter auditing rules within the next three years.

Lastly, the Chinese government seems to have concluded its antitrust probe of Alibaba with a $2.8 billion fine and a ban on its exclusive deals with big brands. That's bad news for Alibaba, but some of JD's investors were likely expecting stiffer penalties and restrictions against the e-commerce leader.

The market's distaste for growing tech stocks, especially Chinese ones, could persist for the foreseeable future. Nonetheless, investors who expect JD to keep growing over the long term should still consider accumulating some shares of this resilient retail giant.