Is It Too Late to Buy JD.com Stock?

JD.com (JD 6.12%) posted its second-quarter earnings report on Aug. 16. The Chinese e-commerce giant's revenue rose 8% year over year to 287.9 billion yuan ($39.7 billion) and exceeded analysts' expectations by $1.2 billion. Its adjusted net income grew 32% to 8.6 billion yuan ($1.2 billion), or $0.74 per American depositary receipt (ADR), which also cleared the consensus forecast by $0.06.

Those headline numbers looked healthy, but JD's stock dipped after the report and remains down about 40% for the year. Is it too late to bet on its long-term recovery in this turbulent market?

Image source: JD.com.

Reviewing the key numbers

JD generated 84% of its revenue from JD Retail, which houses its online marketplace and brick-and-mortar stores, in Q2. The growth of that business has been lumpy over the past year as it faced macro and competitive headwinds.

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

On the macro front, JD Retail grappled with China's uneven post-pandemic recovery. Its annual 618 Shopping Festival, which occurs every June to commemorate its founding 25 years ago, boosted its sales during Q2 -- but promotions and higher ecosystem investments compressed its operating margin.

Alibaba Group and Pinduoduo also remain formidable competitors in China's e-commerce market. In their latest quarters, Alibaba's Taobao and Tmall revenue rose 12% year over year, while Pinduoduo's revenue surged 58%. Alibaba seems to be outgrowing the antitrust shackles that throttled its growth over the past two years, while Pinduoduo continues to lock in consumers with its focus on discount goods and farm-to-table deliveries of fresh produce.

How are its smaller businesses faring?

JD generated the rest of its Q2 revenue from its JD Logistics, the online grocer Dada, and its "new businesses" (which include its cloud, fintech, healthcare, international, and other smaller units). Its Logistics and Dada units grew their revenues by 31% and 23% year over year, respectively, but its new business revenue tumbled 31% as it scaled back Jingxi (its discount competitor to Pinduoduo) and its international business.

JD's decision to pour less cash into Jingxi suggests it's surrendering the lower-end market to Pinduoduo, and its lack of international progress puts it far behind Alibaba and Pinduoduo. Alibaba already serves overseas shoppers with its Southeast Asian marketplace Lazada, its Turkish marketplace Trendyol, and its cross-border marketplace AliExpress. Pinduoduo has also established a rapidly growing overseas presence with its discount marketplace Temu over the past year. JD previously expanded into Southeast Asia, but it shut down its Indonesian and Thai marketplaces earlier this year.

On the bright side, the margins of those smaller businesses are expanding as JD adopts a more disciplined approach toward expanding its ecosystem. JD Logistics' adjusted operating margin expanded year over year from 0.1% to 1.2% as it continued to process more deliveries for third-party customers. Dada's adjusted operating margin improved from negative 18.6% to negative 1%, while the adjusted operating margin of its new businesses rose from negative 32.4% to positive 24.6%.

Is JD undervalued relative to its growth potential?

JD generated 1.05 trillion yuan ($144 billion) in revenue in 2022. It insists it can create three new enterprises that can each generate at least 1 trillion yuan ($137 billion) in revenue with 70 billion yuan ($10 billion) in net profit over the next 20 years. During those two decades, it also plans to nurture the growth of five new companies that will join the Fortune Global 500, as well as seven publicly listed companies with market caps of at least 100 billion yuan ($14 billion) each.

That ambitious plan suggests JD wants to become a more diversified conglomerate like Alibaba. But that roadmap also implies the growth of JD Retail will slow down and drive it to rely more heavily on its smaller businesses for growth.

For now, analysts expect JD's revenue to grow at a compound annual growth rate (CAGR) of 8% from 2022 to 2025. However, they also expect its earnings per ADR to grow at a CAGR of 51% as it continues to streamline its spending.

Based on those estimates, JD looks dirt cheap at 16 times this year's earnings. Alibaba and Pinduoduo trade at 13 and 21 times this year's earnings, respectively. However, all three of these e-commerce giants are trading at discounts because they face unresolved delisting threats in the U.S. market. China's sluggish post-pandemic recovery is also driving the bulls away.

But if you believe those headwinds will eventually pass, then it's probably not too late to buy JD's stock. Instead, it might be a great time to scoop up more shares at these historically low valuations and simply tune out all the near-term noise.