JD's (JD +0.65%) stock surged 150% last year as the Chinese e-commerce giant delivered quarter upon quarter of dazzling growth. But this year, JD lost more than a fourth of its value as regulatory threats in China and the U.S. sparked an investor exodus from Chinese tech stocks.
It might seem unfair for JD to be crushed alongside those other stocks. After all, JD wasn't hit by an antitrust probe and record fine like its rival Alibaba (BABA 0.60%). The regulators didn't suspend JD's app -- as they did with Didi Global (DIDI +1.14%) -- nor did they ask it to suspend its new user registrations, as Tencent (TCEHY 4.39%) recently did with WeChat.
Image source: JD.com.
Yet JD's stock now trades at just 27 times forward earnings and less than one times this year's sales, making it much cheaper than many other e-commerce companies with comparable growth rates. Should investors ignore the constant noise and fear about Chinese tech stocks and simply buy JD, or should they wait for the storm to pass before accumulating more shares?
JD isn't immune to regulatory threats
Alibaba's antitrust challenges might initially sound like good news for JD. After all, China's regulators forced Alibaba to end its exclusive deals with merchants and big brands -- which could soften its defenses against JD, Pinduoduo, and other smaller e-commerce platforms.
But JD also isn't an underdog -- it's actually China's largest direct retailer in terms of annual revenue. Unlike Alibaba, which mainly connects third-party sellers to buyers on Taobao and Tmall, JD is primarily a first-party retailer that takes on its own inventories and fulfills orders with its own logistics network.
That scale, which most Chinese retailers can't match, has also made JD a target for China's regulators. Five years ago, Beijing's Municipal Commission of Development and Reform (BMCDR) fined JD 500,000 yuan ($76,889) for posting "misleading" prices and issuing fake coupons.
Last year, China's State Administration of Market Regulation (SAMR) fined JD, Alibaba's Tmall, and Vipshop 500,000 yuan each after customers complained about "irregular" pricing strategies during the annual Singles Day (Nov. 11) shopping event.
This year, the SAMR hit JD with seven additional fines -- ranging from 60,000 ($9,227) yuan to 400,000 yuan ($61,511) each -- for false advertising and unspecified violations of China's antitrust laws.
Yet these fines were insignificant relative to JD's revenue of $114.3 billion last year, and tiny compared to Alibaba's record antitrust fine of $2.75 billion. JD also wasn't forced to significantly alter its business practices. As a result, Alibaba's antitrust drama largely overshadowed JD's penalties.
But does that mean JD is a safer stock than Alibaba?
JD isn't in as much trouble as Alibaba, but it's still exposed to many of the same regulatory threats. China's recent crackdown on its for-profit education companies suggests it will start barring Chinese companies in "sensitive" sectors -- such as education and technology -- from going public in the U.S. as VIEs (variable interest entities) in the future.
Image source: JD.com.
JD, Alibaba, and many other Chinese tech companies use VIEs to circumvent China's restrictions on foreign investments in sensitive sectors. A VIE is a holding company that is set up outside of China -- usually in the Cayman Islands -- and holds shares of a Chinese company. The VIE then lists its new shares on U.S. exchanges.
If China closes this loophole, VIEs will no longer be able to own shares of Chinese companies. To make matters worse, U.S. regulators could force the exchanges to delist all U.S.-listed foreign companies that don't comply with tighter auditing rules within the next three years. These threats arguably make JD's Hong Kong-listed shares much safer than its U.S.-listed ADRs.
JD's treasure trove of data on its 500 million annual active customers could also make it a target for the Cyberspace Administration of China (CAC), which already called out more than a hundred apps for "improper" data gathering methods earlier this year. Therefore, it wouldn't be surprising if the CAC abruptly asks JD to temporarily suspend its app or new shopper registrations.
But is JD's stock worth buying?
If JD were based in any other country, I'd consider it an undervalued growth stock. Last year, its revenue rose 29%, its GMV (gross merchandise volume) jumped 25%, and its adjusted earnings grew 46%. Wall Street expects its revenue to grow another 28% this year, and 22% in 2022.
JD controls one of the largest logistics networks in China, it's branching out into new markets with cloud, telehealth, and fintech services, and its superior scale enables it to generate stable profits from its slim margins.
Unfortunately, JD is still based in China -- and it's just as exposed to the unpredictable regulatory headwinds as other Chinese stocks. Those looming threats justify its current discount, so I'd rather buy promising e-commerce stocks in other Asian markets than roll the dice on JD right now.
