JD.Com (JD 0.36%), one of China's top three e-commerce companies, has seen its stock price almost halve after reaching a peak price of $104 in 2021.Yet even as its stock price fell, the company continued to grow its top line by 28% in 2021.
This could make the stock a potentially attractive investment for contrarian investors. But before rushing into the stock, here are a few things to consider.
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Its historical track record has been solid
JD is an excellent example of what a solid growth company looks like. Between 2016 and 2021, revenue rose at a 30% compound annual growth rate (CAGR) to reach 952 billion yuan ($149 billion). Non-GAAP net profit grew even faster -- at a 52% rate -- to 17.2 billion yuan ($2.7 billion).
JD's growth resulted from its strategy of selling high-quality products at low prices and delivering them quickly to customers. Happy customers, in turn, spent more money with the e-commerce company, which allowed it to lower product prices further -- thanks to bulk purchases -- and improve logistics service. In other words, JD has been replicating Amazon's playbook in China.
The outcome was a virtuous circle of lower unit cost, higher sales volume, and growing customer numbers. With its scale, JD could invest heavily in leading technological solutions -- for example, fully automated factories -- which further improve its operating efficiency, cost structure, and customer satisfaction.
By relentlessly focusing on satisfying customers, JD amassed 588 million users over the years, compounded revenue at a 30% annualized rate over the last five years, and propelled net profit at an even faster rate (52%) thanks to operating leverage.
Latest performance has been a mixed bag
2022 has been a different story. It's been a challenging year for most companies, including JD.
The ongoing COVID-19 lockdowns in China and the weaker economy affected JD's sales. Revenue growth slowed to 5% and 11%, respectively, in the second and third quarters. Investors accustomed to JD's high double-digit growth rate might feel uncomfortable with the declining growth.
Still, there are some positive points to note. While JD's growth rate for e-commerce product sales slowed to just 6%, service revenue continued to grow nicely (42% year over year) in the third quarter thanks to JD logistics. And while top-line growth slowed, JD's Non-GAAP operating profit expanded by 33% to 4.7 billion yuan ($700 million) thanks to margin expansion.
The Chinese company also ended the third quarter with a solid cash position of 218 billion yuan ($30.7 billion) in cash and cash equivalents, restricted cash, and short-term investments. With its large cash hoard, JD is well-positioned to invest in growth for years to come.
JD's prospects remain bright
JD's slowing growth recently might have caused investors to wonder whether the tech company's best days are over. I think JD's recent performance is temporary rather than permanent.
China is still a developing country, and its per-capita GDP is just about one-fifth that of the United States. As China's economy grows, its citizens will have more money to spend on goods and services. A prosperous society should lift all boats, including JD's e-commerce business.
Moreover, JD has diversified into other segments such as healthcare, fintech, logistics, and other activities. These businesses are younger and growing at much higher rates. As JD's e-commerce business starts to mature, these younger ventures can carry the baton to sustain the conglomerate's growth machine.
To this end, JD's solid financial position allows it to sustain a high level of investment in these fast-growing but loss-making businesses. As mentioned above, the company has more than $30 billion in cash. On top of that, it gets cash replenishments from its mature e-commerce business -- free cash flow was 25.8 billion yuan ($3.6 billion) in the last 12 months.
In short, JD's long-term growth prospects likely remain intact despite its recent slowdown.
So is JD stock a buy, hold, or sell?
Lately, the e-commerce company's growth has slowed down amid COVID-19 lockdowns in China and a weaker economic environment. In the long term, JD is well-positioned to ride the e-commerce wave in China and reinvest its profits from the e-commerce business into smaller but faster-growing segments like logistics and healthcare.
JD stock has delivered a solid performance since its IPO. And at this point, the shares are not a sell; they're at least a hold for now. But whether or not it's a buy depends on investors' risk appetite. If they can handle the potential volatility of owning a China-based company, then buying the stock makes sense since it's trading at a price-to-sales ratio of 0.7, just half its five-year average ratio of 1.4.
