JD.com (JD 2.06%) posted its fourth-quarter earnings report on March 9. The Chinese e-commerce giant's revenue rose 7% year over year to 295.4 billion yuan ($42.8 billion) and beat analysts' estimates by $190 million. Its adjusted net income grew 64% to 28.2 billion yuan ($4.1 billion), or $0.70 per ADS, and cleared the consensus forecast by $0.20.

Those headline numbers looked solid, but JD's stock plunged 11% after the report and remains 60% below its all-time high from February 2021. Let's see why the bulls retreated -- and if JD is a potential turnaround play for 2023.

One of JD's autonomous delivery vehicles.

Image source: JD.com.

Why did the bulls abandon JD?

JD is China's largest retailer in terms of annual revenue. It generates most of its sales through its first-party marketplace, but it's gradually expanding its third-party marketplace to boost its margins. JD serves fewer online shoppers than Alibaba and Pinduoduo -- which both operate third-party marketplaces -- but its core first-party marketplace enables it to generate higher revenue per customer.

However, JD's first-party marketplace takes on its own inventories and operates at much lower margins than Alibaba and Pinduoduo, which don't take on any inventories for their third-party marketplaces. JD offsets some of that pressure by providing its own logistics services, which were expanded by years of big investments, to external customers.

JD generated 89% of its revenue and over 100% of its operating profits from its core JD Retail segment in 2022. However, the growth of that business decelerated over the past year -- even though its adjusted operating margins held steady:

Metric

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

JD Retail revenue growth (YOY)

21.3%

17.1%

3.9%

7%

3.6%

JD Retail adjusted operating margin

2.1%

3.6%

3.4%

5.2%

3%

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

JD attributed that slowdown to tough macro headwinds and China's intermittent zero-COVID lockdowns throughout the year, and it unexpectedly stopped disclosing its growth in annual active users (which had reached 588 million in the third quarter) for the first time in the fourth quarter.

That change wasn't too surprising, since Alibaba and Pinduoduo also stopped disclosing their exact user numbers several quarters ago. But it makes it tougher to gauge the platform's growth. On the bright side, JD Retail's adjusted operating margin still rose 60 basis points to 3.7% for the full year as it reined in its spending and streamlined its business.

JD's new businesses segment (which includes its cloud, fintech, and healthcare units) and its stake in the online grocer Dada also continue to bleed red ink, but it narrowed most of those losses over the past year.

Furthermore, JD Logistics' revenue rose 31% for the full year, which outpaced JD Retail's 7% growth, and accounted for 13% of the company's top line. JD Logistics' operating margin also climbed from negative 1.7% in 2021 to positive 0.4% in 2022 -- which reflects its improved scale and the expansion of its third-party logistics services for external customers.

All of those bottom-line improvements boosted JD's total adjusted operating margin from 1.4% in 2021 to 2.6% in 2022, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin rose from 2% to 3.2%.

But are JD's high-growth days over?

JD didn't provide any precise guidance for 2023, but it previously sent a few mixed signals. It recently shut down its marketplaces in Indonesia and Thailand, which are both dominated by Sea Limited's Shopee. That retreat could strengthen JD Retail's margins but throttle its overseas growth.

It also plans to invest $1.5 billion in a new subsidiary that will focus on selling cheaper products -- which suggests it's struggling to keep pace with Pinduoduo in China's lower-end market. However, China's entire e-commerce sector could still heat up again this year as China ends its zero-COVID policies and the macro environment stabilizes.

Analysts expect JD's revenue and earnings to rise a respective 14% and 102% in 2023, as those tailwinds offset its headwinds. Based on those expectations, JD trades at 22 times forward earnings.

Alibaba, which is expected to grow much slower than JD in fiscal 2024 (which starts at the end of March), trades at 13 times next year's earnings. Pinduoduo, which is growing faster than JD and Alibaba, trades at 26 times forward earnings.

Is it the right time to buy JD?

Therefore, JD looks reasonably valued -- but not cheap -- relative to its peers. The unresolved threat of U.S. regulators delisting Chinese stocks still looms over the entire sector, while rising interest rates will keep investors glued to more conservative investments for at least a few more quarters.

I personally wouldn't buy JD until its growth either stabilizes or accelerates again. If I had to pick a Chinese e-commerce stock right now, I'd definitely buy Pinduoduo for its stronger growth rates instead of JD.