JD.com Inc: Earning Big Returns…from a Chinese E-Commerce Company?

Why JD Stock Deserves a Serious Look

In a time where the U.S.-China trade war often appears in the headlines, who would have thought that a Chinese company listed on a U.S. stock exchange would be soaring?

But it is happening. On Tuesday August 13, shares of JD.com Inc (NASDAQ:JD) surged more than 12%.

The reality is that while the trade tension with the U.S. has certainly made the outlook gloomier for many Chinese businesses, the country does have one industry that’s absolutely firing on all cylinders: e-commerce.

According to data from iResearch Consulting Group, the gross merchandise volume (GMV) of China’s online shopping market was CNY$1.9 trillion (US$269.75 billion) in 2013. In 2018, China’s e-commerce GMV totaled CNY$8.0 trillion yuan. So in just five years, the country’s e-commerce industry has expanded by more than fourfold. (Source: “GMV of China’s Online Shopping Market Hit 8.0 Tn Yuan in 2018,” iResearch Consulting Group, March 22, 2019.)

Looking ahead, iResearch expects the GMV of China’s online shopping market to keep growing at double-digit pace to CNY$11.3 trillion (US$1.60 trillion) by 2020.

And that’s where JD.com Inc found its opportunity. Headquartered in Beijing, the company operates a huge online retail platform in China. It also happens to be a leading retail infrastructure service provider in the country. From 2012 to 2018, JD.com Inc’s revenue skyrocketed from CNY$41.4 billion (US$5.88 billion) to CNY$462.0 billion (US$65.59 billion), translating to a compound annual growth rate (CAGR) of 50%. (Source: “JD.com, Inc. Financial and Operational Highlights August 2019,” JD.com Inc, last accessed August 13, 2019.)

JD.com Inc completed its initial public offering in May 2014. Its shares currently trade on the Nasdaq under the ticker symbol “JD,” so it’s very convenient for American investors to get a piece of the action.

JD.com Inc: Still Running a Fast-Growing Business

Now, as I said, the trade tension between the U.S. and China has brought a lot of uncertainty towards to the stock market, and especially to Chinese companies trading on U.S. stock exchanges. So why is JD stock soaring?

Well, because the company just delivered a stellar earnings report.

JD.com Inc reported second-quarter 2019 results on Tuesday morning. It showed that the company generated net revenues of $21.9 billion during the quarter. The number not only represented a 22.9% increase year-over-year, but also beat Wall Street’s expectation of $20.9 billion. (Source: “JD.com Announces Second Quarter 2019 Results,” JD.com Inc, August 13, 2019.)

What’s even more impressive was the company’s bottom line. For the quarter, JD.com Inc generated a net income of $90.1 million. This marked a substantial improvement because in the year-ago quarter, the company incurred a net loss.

The bottom line result also surprised Wall Street. On average, analysts expected the Chinese e-commerce company to report a net loss of $6.3 million for the quarter.

Meanwhile, JD.com Inc generated CNY$18.3 billion (US$2.60 billion) in free cash flow in the second quarter of 2019. Again, this represented a sizable year-over-year improvement as the company’s free cash flow totaled CNY$13.1 billion (US$1.86 billion) in the second quarter of 2018.

Faster-than expected revenue growth, coupled with a surprise profit, made JD stock the star of the trading day. The company’s shares closed with a 12.9% gain at $30.66 on Tuesday, making JD.com Inc the top gainer on the Nasdaq-100 for the trading session.

The reality is, the critics can say what they want, but they cannot deny the fact that JD.com Inc is growing its business at a rapid pace. In the June quarter, the company’s active customer accounts totaled 321.3 million, which was 7.5 million accounts more than what it had in the second quarter of 2018.

One of the strategies that JD.com Inc has been pursing is partnering with luxury brands. In recent months, the company has struck new partnerships with Prada, Miu Miu, Mulberry, and Guiseppe Zanotti, just to name a few. The availability of these premium international brands on JD.com could further boost the appeal of the company’s online shopping platform.

At the same time, just like Amazon.com, Inc.  (NASDAQ:AMZN) has “Amazon Prime,” JD.com also has its own membership program, “JD PLUS.” The program, which was introduced in 2016, offers customers a wide range of perks. In June, the company announced a partnership with 19 international hotel brands to offer JD PLUS members special discounts and benefits.

JD.com Inc (NASDAQ:JD) Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

Despite the heightened trade tension between China and the U.S. this year, shares of this Chinese e-commerce giant had quite a rally. Year-to-date, JD stock is up a whopping 46.5%.

Sure, there’s plenty of geopolitical uncertainty going forward. But with continued expansion in China’s e-commerce industry, JD.com Inc’s business will likely keep growing.