What happened

Shares of Chinese e-commerce company JD.com (JD 6.12%) plunged 39.2% in the first half of 2023, according to data from S&P Global Market Intelligence.

Chinese stocks had a run-up into the end of 2022 after the Communist Party's early December about-face on its harsh zero-COVID lockdown policies.

However, when JD reported results through the first half of 2023, its reported numbers and outlook were quite muted, which was generally in-line with many other Chinese tech stocks. In addition, JD seemed to feel some competitive pressure from aggressive price wars among its domestic e-commerce rivals. Thus, its stock tumbled through the first half of the year.

But is a delayed recovery in the Chinese economy, and therefore JD's stock, in the cards?

So what

The Chinese government's zero-COVID policies, its regulatory crackdown on large technology companies, and the popping of China's domestic-property bubble all seem to have contributed to a lasting pall over the Chinese economy.

In JD's fourth-quarter 2022 and first-quarter 2023 earnings releases, while revenue and earnings-per-share figures generally came in ahead of Wall Street consensus estimates, JD's growth stagnated compared to last year. By Q1, growth showed just a 1.4% rise over the prior-year quarter, the slowest in JD's recent history. Given JD's heavy investments in its fully owned logistics infrastructure and delivery operations, which result in low single-digit operating margins, investors are counting on robust revenue growth and operating leverage to increase profits in the future, and 1.4% growth isn't going to cut it. 

Moreover, JD seemed to acknowledge some extra company-specific challenges during the first half. On the Q4 call, JD announced it would close its sites in both Indonesia and Thailand while also investing in a new subsidiary that will focus on low-cost items for cash-strapped consumers.

The closing down of international sites seemed to indicate JD's growth may be limited to its home country and that it's being outdone by local e-commerce companies in Southeast Asia. Meanwhile, the new investment in a budget-conscious site may indicate competitive pressures from low-priced, group-buying platform Pinduoduo (PDD 2.80%), as well as continued challenges for the Chinese consumer. Of note, Pinduoduo's growth for Q1 was a staggering 58% in sharp contrast to JD's near-zero growth over the same time period.

Now what

After its poor first half, JD now trades at roughly 21 times earnings but just 13 times this year's earnings expectations and just 11 times 2024 earnings expectations. That seems very cheap but also implies that China's economy will get back to some modicum of growth in the back half of 2023 and going forward.  

While growth has been stagnant in the first half of the year, some are optimistic China will turn to stimulating its economy. Moreover, just today, Chinese Premier Li Qiang praised some leading technology companies for investing in innovation, while also urging local governments to support the country's tech companies. That suggests the years-long crackdown on the country's tech giants may be ending. 

With a rock-bottom valuation, JD may be worth a look now for contrarian investors. However, the U.S.-China rivalry and geopolitics will continue to hang over all Chinese stocks, so that is a risk investors will have to grapple with moving forward.