If asked to name one e-commerce company, most people will immediately say, "Amazon." But there are other e-commerce players out there worthy of investors' attention. One of them is China's leading e-commerce company, JD.com (JD 1.13%). Let's explore the strengths and weaknesses of JD.com as a potential investment.
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Reasons to be bullish about JD.com
JD.com is doing a good job of replicating Amazon's playbook. It operates a combination of first- and third-party e-commerce businesses in China. It sells directly to customers and opens up its platform for external sellers in exchange for fees from each successful transaction.
Also like Amazon, the company emphasizes customer satisfaction. JD.com offers low-priced products and delivers them quickly via its self-operated logistics network. Happy customers purchase more products, which allows the company to reduce the prices further and improve its logistics efficiency. This leads to a virtuous cycle of ever-growing users and lower prices.
In other words, JD.com is using a proven strategy in China, and it's working, which is evident in the company's financials. Between 2017 and 2022, revenue increased by a compound annual growth rate (CAGR) of 24% to 1 trillion yuan ($152 billion). Similarly, non-GAAP net profit rose more than fivefold over that period to 28.2 billion yuan ($4.1 billion).
JD.com's early success in e-commerce opens up opportunities for the company to expand horizontally into related industries such as logistics, fintech, healthcare, etc. These newer ventures have higher growth rates, which should keep the company busy for years. For instance, JD.com's e-commerce marketplace revenue grew 11% in the fourth quarter of 2022, while logistics and other services surged by 75%.
And with its solid cash flow -- JD.com generated more than $5 billion in operating cash flow in 2022 -- the company has all the financial resources it needs to invest for growth in the coming years.
Reasons to be bearish about JD.com
Now that we have looked at the bullish thesis, it's only fair to consider the potential pitfalls of investing in this e-commerce company.
Topping the list is the unavoidable risk of investing in China-based companies. Low transparency, cultural differences, and political risks have made investing in Chinese stocks challenging for foreign investors. In particular, the Chinese government's recent crackdown on major technology firms has caused a massive sell-down in Chinese companies, including JD.com.
Another caution worth mentioning is the political tension between the U.S. and China. I don't think there is any way JD.com can mitigate this risk, so anyone who intends to hold Chinese stocks will need a strong stomach to handle the potential volatility.
And if that's not enough, JD.com operates in a highly competitive market that includes players like Alibaba and Pinduoduo. These companies have financial resources and talents that will make it difficult for JD.com to grow its market share. Fortunately, thanks to the ever-increasing per-capita GDP, the e-commerce market in China is massive and still growing, so it can accommodate multiple players.
So why should investors bother?
Many traits make JD.com a potentially good investment. The downside is that investors must accept the competitive and geopolitical risks of owning the stock.
Overall, I err toward the bullish side, especially if we consider JD.com's low valuation relative to its American peer. To put it into perspective, the company has a price-to-sales ratio of 0.4, much lower than Amazon's multiple of 2.1. So those looking to invest in an e-commerce company that's not Amazon might want to keep JD.com on their radar.
