JD.com's (JD) stock price rose 4% on May 17 after the Chinese e-commerce giant posted its first-quarter earnings report. Its revenue rose 18% year over year to 239.7 billion yuan ($37.8 billion) and beat analysts' estimates by $3.1 billion. Its adjusted net income stayed flat at 4.0 billion yuan, or $0.40 per share, but also cleared the consensus forecast by $0.16 a share.
Those headline numbers look solid, but is JD's stock worth buying as the bulls broadly shun both Chinese tech stocks and e-commerce plays?
Image source: JD.com.
Another quarter of decelerating growth
JD Retail, the company's core e-commerce business, grew its revenue 17% year over year to 217.5 billion yuan ($34.3 billion). Its total number of annual active customers grew 16% to 580.5 million. However, JD Retail's growth has still decelerated significantly over the past year:
|
Growth (YOY) |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
|---|---|---|---|---|---|
|
JD Retail revenue |
35.3% |
22.7% |
23% |
21.3% |
17.1% |
|
Annual active customers |
29% |
27.4% |
25% |
20.7% |
16.2% |
|
Total revenue |
39% |
26.2% |
25.5% |
23% |
18% |
YOY = Year-over-year. RMB terms. Data source: JD.com.
During the conference call, CEO Lei Xu attributed that slowdown to supply chain disruptions, "soft" consumer sentiment in China, and the resurgence of COVID-19 cases in recent months.
As JD's top-line growth decelerated, it ramped up its marketing spending for China's annual Spring Festival Gala, sold a higher mix of lower-margin products (such as groceries and health products) as the outbreak spread, and incurred higher COVID-19-related expenses across its fulfillment network.
As a result, JD Retail's adjusted operating margin declined 140 basis points year over year to 3.6%. However, the company's total adjusted operating margin still rose 20 basis points to 1.9% as its stand-alone logistics unit, JD Logistics (JDL), significantly narrowed its operating losses.
Its slowdown could continue in the second quarter
JD usually generates strong growth during the second quarter, which includes its annual 618 Grand Promotion sale (which marks the anniversary of the company's founding on June 18).
That extended shopping holiday, which is comparable to Alibaba's (BABA) Singles Day, usually starts in late May and lasts throughout all of June. But during the conference call, Xu said the "majority of brands and merchants" remained "under pressure" ahead of the event as they grappled with the supply chain and COVID-19-related disruptions.
However, Xu also said that its third-party merchants were "more proactively participating" in the 618 Grand Promotion compared to the previous year, which suggests they're eager to gain new shoppers after the COVID-induced slowdown.
JD didn't provide any guidance for the second quarter, but analysts expect its revenue to rise just 10% year over year. For the full year, analysts expect its revenue to increase 16% -- compared to its 28% growth in 2021. By comparison, Alibaba is expected to grow its revenue by 19% in fiscal 2022 (which ended this March) and just 13% in fiscal 2023.
Its "new businesses" could squeeze its margins
In the first quarter, JD Retail's operating income rose 8% year over year to 7.89 billion yuan ($1.25 billion) as JD Logistics' operating loss narrowed from 1.47 billion to 661 million yuan ($104 million).
But its "new businesses" segment -- which includes JD Property (its infrastructure asset and property management subsidiary), Jingxi (its discount marketplace for lower-tier cities), overseas businesses, and other technology initiatives -- partly offset those improvements with its steep losses.
The segment's revenue only rose 12% to 5.76 billion yuan ($908 million), but its operating loss widened from 2.28 billion yuan to 2.39 billion yuan ($377 million). If these new businesses continue to bleed red ink as JD Retail's growth decelerates, the company's total operating margins could tumble.
The stock is still attractively valued
JD's growth is cooling off, but it looks dirt cheap at 0.5 times this year's sales. Alibaba looks similarly undervalued at 1.7 times its fiscal 2023 sales.
Those steep discounts reflect the market's uncertainty about Chinese tech stocks amid the unpredictable regulatory headwinds in China, delisting fears in the U.S., and the recent COVID-19 lockdowns. If JD overcomes all those challenges, its stock could rally a lot higher.
But for now, I wouldn't rush to invest in JD. This market is already tough for most tech stocks, and JD still faces too many near-term headwinds to be considered a worthwhile investment.
