JD.com's (JD -2.30%) stock price rose 3% on Aug. 23 after the Chinese e-commerce giant posted its second-quarter earnings report. Its revenue rose 5% year over year to 267.6 billion yuan ($40 billion), which beat analysts' estimates by $1.4 billion.

Its adjusted net income increased 40% to 6.5 billion yuan ($969 million), or $0.61 per ADS, which also cleared the consensus forecast by $0.20. JD's growth rates look stable, but let's review the bear and bull cases to see if its stock is worth buying in this challenging market for Chinese equities.

JD's autonomous delivery vehicles.

Image source: JD.com.

What the bears will tell you about JD.com

The bears dislike JD for three main reasons: Its growth is decelerating, it faces tough macroeconomic and competitive headwinds in China, and its future plans could be derailed by regulatory challenges.

JD's annual active customer count rose 9% year over year to 580.8 million in the second quarter. The revenue from its core JD Retail business, which accounted for 90% of its top line, grew by 4%. However, both growth rates have cooled from the double digits to the single digits over the past year.

Period

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Annual Active Customers Growth (YOY)

27.4%

25%

20.7%

16.2%

9.2%

JD Retail Revenue Growth (YOY)

22.7%

23%

21.3%

17.1%

3.9%

Total Revenue Growth (YOY)

26.2%

25.5%

23%

18%

5.4%

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

JD's tepid growth in the second quarter was even more disappointing because it included its annual 618 Grand Promotion sale in June, which is comparable to Alibaba's (BABA -0.90%) Singles Day in November.

Like Alibaba, JD mainly blames its slowdown on COVID-19 disruptions and macro headwinds. Analysts expect its revenue to rise just 13% this year, compared to its 28% growth in 2021.

As JD's growth decelerates, it also faces tighter regulations. In China, government regulators have already fined JD over its previously unapproved deals, postponed an IPO for its fintech division, and fined its logistics division for a breach of its strict "zero-COVID" measures. JD hasn't been hit by a massive antitrust fine like Alibaba yet, but that constant oversight could scuttle the expansion of its ecosystem into adjacent markets. In the U.S., JD's shares could be delisted if it doesn't comply with tighter auditing standards under the new Holding Foreign Companies Accountable Act (HFCAA).

What the bulls will tell you about JD.com

The bulls still love JD because it's a market leader, it has a reputation for selling high-quality merchandise, its margins are improving, and its stock is cheap relative to its growth potential.

JD serves fewer customers than Alibaba or Pinduoduo (PDD 5.40%), but it's still the largest direct retailer in China in terms of revenue. While Alibaba's Taobao and Pinduoduo primarily facilitate third-party transactions, JD generates most of its revenue from its first-party marketplace, which takes on its own inventories and provides much tighter quality control measures. That capital-intensive model causes JD to operate at lower margins than Alibaba and Pinduoduo, but it also keeps it from joining both rivals on overseas trade blacklists for peddling counterfeit products.

Economies of scale have also kicked in for JD in recent years, thanks to the expansion of its first-party logistics network, and enabled it to generate stable profits. Those improvements can be seen in its operating and adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margins, which still grew year-over-year in the second quarter even as its revenue growth cooled off.

Period

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

JD Retail Operating Margin*

2.6%

4%

2.1%

3.6%

3.4%

Total Operating Margin

1%

2.1%

1%

1.9%

2.1%

Adjusted EBITDA Margin

1.5%

2.7%

1.5%

2.5%

2.7%

Data source: JD.com. *Adjusted basis.

For the full year, analysts expect JD's adjusted EBITDA margin to expand about 50 basis points to 2.5%, and for its adjusted EPS to rise 17%. Its stock might not initially seem cheap relative to its profit growth at 31 times forward earnings, but it also trades at less than one times this year's sales. Therefore, JD's P/E ratio could contract significantly if its profitability continues to improve.

It's still not the right time to buy JD.com

If JD weren't a Chinese company, I'd heartily recommend buying its stock. Unfortunately, it still generates most of its revenue from the sluggish Chinese market, and it will continue to be scrutinized by Chinese and American regulators for the foreseeable future.

JD's stock won't drop off a cliff anytime soon, but its valuations will remain compressed so long as investors continue to shun Chinese tech stocks. Until that sentiment improves, investors should stick with stronger e-commerce plays that don't have any exposure to the unpredictable Chinese market.