It's been a rough few years for Chinese tech stocks as a weak economy, languishing consumer demand, and Beijing's crackdown on the sector weighed on shares.
As a result, most Chinese stocks have underperformed U.S. shares in recent years, and JD.com (JD 6.12%) is clearly among them. Even as the S&P 500 is back at an all-time high, JD.com stock is down 79% from its peak in early 2021, and the stock has declined steadily since then.
However, past performance isn't a guarantee of future returns, and JD's low share price arguably sets it up for a recovery. Let's take a look at the reasons to buy, sell, and hold JD.com.
Image source: Getty Images.
1. Buy JD.com stock
JD.com's growth has been anemic in recent quarters, but the business is solidly profitable, meaning it's healthier than the stock slide and the slow growth rate would make it look.
In its third quarter, revenue rose just 1.7% to $34 billion, but adjusted operating income was up 12% to $1.5 billion, and adjusted earnings per share rose 7% to $0.92.
Most of JD's revenue comes from its first-party retail business, which includes electronics and general merchandise such as groceries, but growth is being driven by its services businesses, such as JD Logistics, where revenue rose 18% to $5.7 billion, and the company is building out its third-party marketplace.
The logistics division represents one of the company's sources of competitive advantage as it's invested significantly in its logistics network and has tested out drone delivery and automated warehouses. That profit helps show that the business is healthier than the overall growth rate and that its growth businesses and overall profit are still strong.
2. Sell JD.com stock
JD.com stock isn't struggling only because the Chinese economy is weak. The company is also losing market share to competitors including PDD Holdings' Pinduduo and Alibaba, both of which outgrew JD in the most recent quarter.
PDD has seen soaring thanks in part to Pinduoduo's social commerce model, which offers deals on goods bought in bulk by large groups, similar to Groupon. PDD posted 94% revenue growth in the most recent quarter. Alibaba's growth has been slower but is still outpacing JD.
JD founder Richard Liu urged the company to be more competitive and believed the company had fallen into a stasis. However, beating back the challenge from Pindudoduo hasn't been easy, and if the trend continues, JD's revenue growth could turn negative.
The stock's performance over the past three years also shows how the business has underperformed expectations that growth would reaccelerate, and China remains a difficult and unpredictable market to invest in.
3. Hold JD.com stock
At the current price, JD.com seems to have gotten cheap enough that it should hit a bottom soon. After all, the stock is trading at a price-to-earnings ratio of just 10.6, and it offers a dividend yield of 2.8%.
For a stock that still seems to have significant growth potential, that looks like a great price. Nor is the Chinese economy expected to be weak forever. It's been an engine of growth for 30 years, and there are signs that Beijing is working to support a recovery this year.
The verdict: sell
At one point, JD was a fast-growing company that appeared to have endless growth ahead of it, but a lot has changed in recent years following Beijing's crackdown in the tech sector, a weak recovery following the post-COVID reopening, and intense competition from Pinduoduo and others.
In other words, JD has had chances to prove itself in the past and has disappointed. With the challenges in China, competition from PDD, and its own slowing top-line growth confronting it, investors can find better stocks to buy elsewhere, and probably outside China.
