JD.com's (JD 2.61%) investors have had a roller-coaster ride of late. In the last 12 months, the stock traded as high as $93 and as low as $42 -- and currently stand at about $65.
While the Chinese e-commerce company delivered a solid 28% growth in its top line in 2021, its stock still trended downward alongside other Chinese companies. With JD's share price still off around one-third from its 12-month high, investors may find its stock attractive.
But before they rush into scooping up JD's shares, here are a few things to consider.
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The good: JD has been executing well
JD.com has a solid track record. In the past five years, it has increased revenue at a compound annual growth rate (CAGR) of 30%. By 2021, it become the largest retailer in China with a revenue of 952 billion yuan (US $149 billion ) -- roughly one-third of Amazon's 2021 revenue of $470 billion.
Sustained top-line growth is just one part of JD's story. It also improved its efficiency and, together with its scale, propelled its e-commerce margin from 0.9% in 2016 to 3.1% in 2021. The net result was an eightfold-plus increase in non-GAAP net profit to 17.2 billion yuan over that period.
Another piece of good news is that JD's strong economic engine is not stopping soon. In the first quarter of 2022, revenue came in 18% higher year over year amid continuous growth in product and service revenue. While some might complain about the lower growth versus 2021, I think it was solid, considering that its larger peer Alibaba only grew by 9%.
Besides its top-line advancement, JD continued to improve its operating metrics. For example, it grew its number of customers to a new record of 581 million and reduced inventory days from 31.2 days last year to 30.2 days in the latest quarter.
Moving forward, JD can count on its flagship e-commerce business and its younger but faster-growing businesses like JD Logistics and JD Health to keep it growing. In other words, this behemoth tech company could grow at a high rate for many years.
The bad: It's difficult to invest in Chinese companies
Investing in Chinese companies offers diversification from just owning U.S. stocks as well as massive growth opportunities thanks to China's vast middle-class population. Understandably, even the best U.S. investors like Warren Buffett and Charlie Munger (despite their general preference for U.S. companies) have investments in China.
Still, it is notoriously risky to invest in Chinese companies. Investors face age-old problems of low transparency, questionable accountability, cultural and language barriers, and an authoritarian government. Historically, foreign investors swallowed these risks by investing in the best-in-breed Chinese companies like Alibaba, hoping that these companies will honor their shareholders the way Western companies typically do.
However, in the last two years, the risks of owning Chinese stocks have become almost unbearable. The Chinese government's severe crackdown on technology companies, the threat of delisting from U.S. stock exchanges, and the ongoing hostile relationship between China and the U.S. have made Chinese stocks a difficult sell to investors.
Many investors did the most rational thing and sold down all Chinese companies. Leading companies like Alibaba, Pinduoduo, and Bilibili are down by more than 50% from their respective peaks. JD fared slightly better since its stock price was down by a bit over 40%.
JD.com's stock price is attractive
In regular times, a company with JD's track record could easily trade at a premium valuation. But since most investors are currently avoiding Chinese stocks altogether, one can buy JD's shares today at a very cheap valuation.
At $62 per share as of this writing, JD is trading at a price-to-sales (P/S) ratio of 0.6 times. Comparatively, Amazon and Shopify are trading at P/S multiples of 2.4 and 9.6, respectively. Though Amazon and Shopify bulls might argue that these are much better companies, the gap is probably too wide to ignore.
So is JD.com stock a buy?
The answer is: It depends. Those unwilling to stomach the risks of investing in Chinese stocks might be better off just avoiding all of them, including JD.
But for those willing to take a more risk-adjusted approach, buying JD's stocks seems like a smart thing to do. After all, it's not often that investors get to buy a company with a solid execution record and good prospects for growth -- and at a dirt-cheap price. Investors get all three with JD.
While it does not mean that investors should go all-in into JD or, by extension, Chinese stocks, investing a small portion of their wealth into JD (and potentially other Chinese stocks) could be financially rewarding over the long term.
