JD.com(NASDAQ: JD) is a controversial stock. Bulls like the company for its solid growth track record in the last few years, propelled by its Amazon-like business model. Bears, however, are concerned about the sustainability of its growth, especially with increasing competitiveness in the Chinese e-commerce industry.
Here's a deep dive into the arguments on both sides to help investors make a more informed decision about JD.com.
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What the bulls like about JD.com
JD has been a solid growth company, with its revenue rising at a compound annual growth rate (CAGR) of 24% from 2017 to 2022. While many reasons contributed to its success, its unique business model has contributed significantly.
First, JD focuses on selling low-priced products and delivering them quickly to customers. It also operates an integrated business model (handling its own warehousing and logistics), which allows it to control the whole user experience from beginning to end. This approach, while capital intensive, enables JD to operate at a higher efficiency and a lower unit cost base, further enhancing JD's ability to offer low prices to customers.
Delighted customers, in turn, stay longer with the company and spend more money on JD's platform over time. A growing business gradually gives JD the scale to reduce its unit cost further and pass on the savings in the form of lower selling prices, resulting in a virtuous cycle of lower unit cost, lower sales prices, and higher sales volume.
Beyond its e-commerce business, JD has also proven to be a successful incubator of new ventures, having built successful businesses in logistics, healthcare, fintech, and others. This playbook offers flexibility and opportunity for JD to direct its unused capital to sustain its growth engine.
And despite the company's solid track record, JD's stock sits at a discount to its peers. For example, JD's shares trade at a price-to-earnings (P/E) ratio of 10, while Pinduoduo's stock trades at a P/E ratio of 28. In short, the bulls claim that buying JD's stock today provides the upside potential without the commensurate downside risk.
What the bears dislike about JD.com
The bulls might tout JD's solid growth track record. The bears, however, think that JD might have passed its prime growth period. JD is already a gigantic company, generating about 1,046 billion yuan ($151.7 billion) in revenue in 2022. It is challenging for companies with more than $100 billion in revenue to keep growing at high rates.
On top of that, JD has to compete against its bigger peers like Alibaba and up-and-coming competitors like Pinduoduo and Douying. These forces likely will negatively impact JD's long-term growth ambitions, and there are early signs of that happening already.
For instance, JD posted an uninspiring 2% revenue growth in 2023's third quarter. Worse, its flagship first-party e-commerce business fell by 1%, a massive deceleration from its historical double-digit growth rates. While it's too early to decide whether such a slowdown is temporary or permanent, the e-commerce company will face enormous pressure to regain its historical growth trajectory.
Beyond JD's own problems, the bears point out the general risks of investing in Chinese companies. Low transparency, cultural differences, and political risks have made investing in Chinese stocks risky for foreign investors. It doesn't help that the relationship between the U.S. and China has deteriorated over the last few years, adding another layer of uncertainty to investing in Chinese companies.
In short, the bears think that JD's stock, while cheap, is cheap for a good reason.
What it means for investors
The bulls and bears both have a worthy rationale for maintaining their stance on JD.com. While the company has historically delivered solid growth, it now faces intense competition from its peers, impacting recent growth.
While its recent stock price decline has resulted in the stock trading at bargain levels, investors must be comfortable with the risks of investing in Chinese companies, creating another layer of uncertainty.
Overall, JD is a highly uncertain investment that could deliver good returns if the company improves its weak performance. However, investors must have a high-risk appetite to own the stock.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lawrence Nga has positions in Alibaba Group and PDD Holdings. The Motley Fool has positions in and recommends Amazon and JD.com. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
