It has been a horrendous few years for investors in JD.com (JD 0.77%). Thanks to a series of challenges, including the Chinese government's tech crackdown, geopolitical tension between the U.S. and China, and the increasingly challenging e-commerce industry, JD's stock price has declined by more than 70% from its peak of $99.91 in 2021.
While most investors have generally shunned the stock, bargain hunters are sniffing for potential opportunities. For those courageous few, is the stock a buy now?
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What does JD do?
If there is a replica of Amazon's e-commerce business model, it would be JD.com.
First, JD operates a combination of direct sales and marketplace e-commerce models. For the former, the e-commerce company purchases products directly from manufacturers and suppliers, holds inventory, and sells it to consumers. This business ensures the authenticity and quality of the products, which is a significant concern in the Chinese market.
Also, like Amazon, JD opens its marketplace to third-party sellers to sell their products online. This approach provides consumers with an extra selection of products, keeping them happy and spending more over time. It also helps JD make more money from commissions and value-added services such as advertising and logistics.
To further ensure the quality of its service, JD has built an extensive logistics network covering every part of the logistics process, from warehousing to last-mile delivery. This infrastructure enables it to offer fast and reliable delivery, often providing same-day or next-day delivery in most parts of China. JD also operates a membership service called JD Plus (think of Amazon Prime) to reward its most loyal customers with additional benefits.
It has also expanded into other areas like fintech, logistics (leveraging its e-commerce infrastructure), healthcare, and property and asset management. In other words, JD is a large tech giant with a hugely diversified business model, which in many ways is similar to Amazon's diversified business structure.
JD's prospects and risks in the next few years
JD's success over the years means the company is no longer small. Between 2018 and 2023, revenue more than doubled from 462 billion yuan to 1.085 trillion yuan ($153 billion). Still, there is room for the company to grow.
To start, China is still a developing country, so an increase in per-capita GDP will lead to higher consumer spending power. Moreover, e-commerce penetration is still ongoing in China and could continue to grow for many years. While competition is likely to remain intense as incumbents like Alibaba and newcomers like Pinduoduo and Douying are all vying to increase market share, these external tailwinds should provide JD (and its peers in China) enough opportunity to grow for many years.
Beyond e-commerce, JD has other areas in which to reinvest its profits to sustain growth. It could double down on its logistics network -- which likely grows alongside the e-commerce industry -- and also invest in other subsidiaries like JD Healthcare and JD Technology. To this end, the rise of new technologies like artificial intelligence (AI) will open up new opportunities for the company, improving its operations and incubating new businesses.
The downside is that investors must endure China-related risks when investing in the stock. This includes regulatory and political uncertainties, the deteriorating geopolitical relationship between the U.S. and China, and the lack of transparency in many areas of financial reporting. These risks add another layer of uncertainty to JD's business.
Is JD's stock cheap?
Another aspect that investors should consider before investing in any company is the stock's valuation. The idea is not to overpay for any stock so as to have a margin of error.
In the case of JD, investors are getting plenty of downside protection thanks to its low valuation. For perspective, the stock trades at a price-to-sales (P/S) and price-to-earnings (P/E) ratio of 0.3 and 12.3, respectively, significantly lower than its five-year average of 1 and 81.6. Comparatively, Amazon has a P/S and P/E ratio of 3.3 and 51.3.
JD's low valuation reflects the bears' concerns about the company, such as competition, China-related risks, etc.
What it means for investors
JD is not a favorite among investors, as evidenced by its low valuation.
On the bright side, the company has a long track record of execution and growth and is well positioned to capture new opportunities in e-commerce and other industries. If the company can sustain its solid execution and grow in the next few years, investors could change their opinion on the stock, giving it a higher valuation.
So, for those willing to embrace the potential volatility of holding a Chinese e-commerce stock, JD.com could be rewarding in the long term.
