JD.com Stock: One Of The Worst Performing Stocks In 2023 Is A Good Investment (NASDAQ:JD) (2024)

Usually at the end of the year or beginning of a new year the stock market is reviewed and one piece of information that is getting a lot of attention are the different lists with the best and worst performing stocks. And one company having a prominent spot on many of these lists is JD.com, Inc. (NASDAQ:JD) as its stock lost almost 49% in 2023. JD is not listed in the S&P 500 (SPY), but if it would be listed it would be almost the worst performing stock listed in the index.

And JD’s performance was not only horrible in 2023, the last three years were a catastrophe for investors. While the S&P 500 increased about 30% since the end of 2020, JD declined 67%. Since its previous all-time high, the stock lost even 75%. To make us feel a little better, we can point out that JD is in good company as many major Chinese businesses (and stocks) saw a similar performance in the last few years.

A natural impulse when seeing a stock that lost a huge part of its previous value is to assume we are dealing with a great investment and bargain. But just assuming a stock is a good investment due to a huge drop of its share price can be a costly mistake and here we must take a closer look. Of course, when knowing that I was already bullish in the past – my last article about JD was published in June 2023 with the stock price declining about 25% since then – you might have a feeling how I look at JD now.

Reasons for the slump in 2023?

Before we try to answer the question if JD could be a good investment for 2024, we must look back at 2023 and try to understand why the stock underperformed in such an extreme way. Of course, there are many different potential reasons for the underperformance of a stock. And when looking not only at 2023 but the last few years, it seems to be the classical combination of a stock trading for high valuation multiples and having high growth expectations but is suddenly not performing so great anymore.

And as the P/E ratio was fluctuating wildly (and I see the P/FCF ratio as the better metric anyway) I will look at the free cash flow multiples in the last few years. And here we see that JD declined from 113 times free cash flow about 3.5 years ago to only 8 times free cash flow. We can certainly argue that JD was overvalued in 2020 and the beginning of 2021 or at least growth expectations that were already priced in the stock were very high.

And as it is often the case, when valuation multiples contract, growth rates of the fundamental business (especially revenue growth) also slowed down. And when looking at JD, we see that growth slowed down over the last ten years – especially since the beginning of 2021. And the stock price is showing strong correlation to the revenue growth rates.

And it seems not to be too difficult to find reasons for revenue growth slowing down. Not only does competition seem to increase, but the Chinese economy is also continuing to face problems.

Let’s start with the increased competition. In my last article about Sea Limited (SE), I already wrote about the competition from ByteDance – and its two major apps Douyin (in China) and Tik Tok (rest of world). And although I mostly talked about the Southeast Asia region, the situation is similar in China. Back then I wrote:

When talking about competition and about companies that could be a threat, TikTok (or its parent company ByteDance) is the one mentioned most often. TikTok Shop is rolled out in different countries – about two months ago also in the United States. And the move is not really surprising as other companies are trying similar moves. YouTube and its parent company Alphabet (GOOG) is also trying to make the video content platform an e-commerce and shopping platform as well. And Douyin – the Chinese counterpart of TikTok (also owned by ByteDance) generated already a merchandise volume of $200 billion in 2022 and we must acknowledge that TikTok and Douyin are not only a social network but can be a powerful e-commerce platform as well.

And while ByteDance (the entire business) is on a good path with its sales soaring past $110 billion in 2023, especially its move into retail seems to be a threat and challenge for companies like JD. In the first three quarters of 2023, beauty sales alone reached $13.6 billion on Douyin and the app will probably continue to take market share from competitors (including JD). Not only Tik Tok is a huge challenge but also existing competitors – especially PDD Holdings (PDD) which owns Temu and Alibaba (BABA). Especially PDD Holdings seems to be a huge challenge for both JD and Alibaba.

In combination with increased competition, we see a Chinese economy that continues to struggle. And a struggling economy (or to put it less drastic: an economy that is growing with a slower pace) usually leads to increased competition.

In the third quarter of 2023, the Chinese economy grew only 4.9% and although this was above expectations, the outlook for the next few years is not great. While the IMF is expecting 5.4% growth for 2023 it will slow down to 3.5% in 2028.

And one of the major reasons for the decline – and one of the huge bearish arguments – is the shrinking Chinese population. While these numbers are only projections (and a lot can happen) it seems like the Chinese population will shrink drastically in the coming decades.

Based on an article by Ian Bremmer I wrote an article China Bullish Thesis Revisited in which I looked at bullish and bearish arguments about the Chinese economy in more detail. And while I still think China will continue to rise and becoming the (or one of the) dominating powers in the world in the next few decades, aspects like the increasing labor costs will also make China less competitive.

And recently, the Chinese government hit Tencent (OTCPK:TCEHY) and some other online game companies hard again – leading to panic among investors with several online gaming companies declining in the double digits. The National Press and Publication Administration (NPPA) issued a draft of rules for online games – including pop-up warnings for irrational consumption behavior and controlling the time and duration for minors to use online games. However, a few days later the Chinese government tried to allay concerns over gaming rules draft.

Although JD has nothing to do with online games and the stock was not affected it showed once again that the Chinese government can shock the stock market again and again and the risk for government interventions is still high.

Quarterly Results

I already mentioned above that revenue growth slowed down – especially when looking at the results in USD. When looking at the results in RMB the picture is a little better. In the third quarter of fiscal 2023, net revenue increased 1.7% year-over-year from RMB 243,535 million in the same quarter last year to RMB 247,698 million. And while top line growth is close to zero, operating income declined even 0.5% YoY from RMB 11,155 million in Q3/22 to RMB 11,097 million in Q3/23. However, when subtracting unallocated items (this is including for example share-based compensation) operating income increased from RMB 8,728 million in the same quarter last year to RMB 9,303 million – resulting in 6.6% year-over-year growth. But the bottom line – diluted net income per share – increased 40.4% year-over-year from RMB 1.78 in Q3/22 to RMB 2.50 in Q3/23.

And finally, free cash flow increased from RMB 2,339 million in Q3/22 to RMB 8,264 million in Q3/23 – resulting in 253% year-over-year growth.

Additionally, we can also look at the results for the nine months ended. Revenue increased 3.7% from RMB 750,790 million in the first nine months of fiscal 2022 to RMB 778,585 million in the first nine months of fiscal 2023. However, income from operations in the first nine months increased from RMB 14,895 million in the same timeframe last year to RMB 24,000 million in the first nine months in 2023 – resulting in 61.1% year-over-year growth. And finally, diluted net income per share increased 195% from RMB 2.22 in 9M/22 to RMB 6.54 in 9M/23.

JD is – similar to Amazon – differentiating between net product revenue and net service revenue. The biggest part of revenue is still stemming from product sales and in Q3/23 the company generated RMB 195,304 million in revenue (0.9% YoY decline). And net services revenues increased 12.7% YoY to RMB 52,394 million – and when looking at service revenue it is especially logistics revenue that grew with a CAGR of 81% in the years 2017 till 2022.

We can also look at the four different segments of JD. The biggest part of revenue is still stemming from JD Retail and in the third quarter this segment generated RMB 212,059 million in revenue (a slight increase compared to the same quarter last year). And aside from being responsible for the biggest part of revenue, the segment is also responsible for almost the entire operating income and generated RMB 11,001 million in operating income (0.7% YoY growth).

Aside from JD Retail it is especially JD Logistics playing an important role for the business. In the third quarter this segment generated RMB 41,663 million in revenue (16.5% YoY growth) and operating income also grew 13.8% YoY to RMB 288 million. Dada also reported increased revenue (20.5% YoY growth to RMB 2,867 million) and still reported an operating loss of RMB 52 million (but compared to RMB 300 million one year earlier this was a huge improvement).

Intrinsic Value Calculation

We can start by looking at the two simple valuation metrics I usually pay attention to – the price-earnings ratio as well as the price-free-cash-flow ratio. Right now, JD is trading for 13 times earnings and when looking at the more important price-free-cash-flow ratio, JD is trading for valuation multiple of only 8.1. These are metrics rather for declining businesses and not a business being able to improve margins and still grow revenue (at least in the single digits).

Another potential explanation for the extremely low P/FCF ratio would be extra-ordinary high free cash flow in the last four quarters (for example due to one-time items). And when looking at the free cash flow (in USD), we are currently seeing the highest amount JD ever reported. But we are looking at a still growing business and the trailing twelve months FCF is not unreasonable.

And not only the P/FCF ratio is pointing towards undervaluation and JD being a bargain – when using a discount cash flow calculation we come to a similar conclusion. As JD is trading in USD (the ADR), we will calculate by using amounts in USD as well. In the last four quarters, free cash flow was $5,400 and we use that as basis. When looking at the Nasdaq trading data we have 1,571.5 million outstanding shares and as always, we calculate with a 10% discount rate. Let’s be very cautious and assume that JD cannot grow ever again – in such a scenario we still get an intrinsic value of $34.35 and the stock currently trading for about $28 is still undervalued. Free cash flow could even decline 2% from now till perpetuity and still be fairly valued (with us expecting a 10% annual return).

However, the question remains how realistic such a scenario is – JD never ever growing its free cash flow again?

Growth

In theory, JD has several different ways to grow in the years to come. Aside from growing its top line (by increasing its revenue), the company can also grow its bottom line by improving its margins and buying back shares.

Let’s start with share buybacks. In the past, share buybacks were not really playing a huge role for JD and so far, there is no sign for JD initiating share buybacks in the coming quarters or years. But when looking at the balance sheet we see currently (on September 30, 2023) $15,895 million in cash and cash equivalents as well as $17,322 million in short-term investments. Considering a market capitalization of $45.5 billion right now, JD could repurchase about 73% of its shares right now (I checked, and I am as sure as I can be that the numbers are correct). Additionally, JD is generating $5,400 million in free cash flow right now (enough to repurchase almost 12% of outstanding shares right now).

A second way to grow the bottom line for JD is by cutting costs and improving margins. Or to put it differently: By not focusing on high growth, the company is focusing on becoming more profitable. At this point, we can assume that JD will continue to improve its margins and higher margins will lead to higher net income and higher earnings per share in the years to come. In case of JF, the company will continue to improve its margins for its JD Retail segment and JD Logistics will most likely become more profitable in the years to come.

And finally, JD can continue to grow by increasing its top line and generating more revenue. Not only can we assume JD Retail will continue to grow, especially the new businesses – including JD Logistics – will be able to grow revenue with a high pace. In the last five years the company grew with a CAGR of 23.63% but in 2022 growth slowed down to 9.95% and in 2023 grow rates will most likely be lower. But I assume that the company will grow with a higher pace again and even growth rates in the single digits are enough to make JD a good investment.

Conclusion

The fact that JD was one of the worst performing stocks in 2023 does not automatically make it a good investment for 2024. And neither is the horrible performance any reason to avoid the stock. I was already bullish about JD in my last article when the stock was trading for higher stock prices and I am very bullish for 2024 and the following years. I don’t know if the stock will already gain much in 2024 – it could very well be the case that troubles will remain. But I have a hard time imagining JD not trading higher in five or ten years from now. And JD is now trading for such a low price that almost every negative scenario – aside from bankruptcy – seems to be priced in.

My analysis is focused on high-quality companies, that can outperform the market over the long-run due to a competitive advantage (economic moat) and high levels of defensibility. Focused on European and North American companies, but without constraints regarding market capitalization (from large cap to small cap companies).My academic background is in sociology and I hold a Master’s Degree in Sociology (with main emphasis on organizational and economic sociology) and a Bachelor’s Degree in Sociology and History.I also write about wide economic moats in my Substack:https://stockmarket101.substack.comI also write about investing, economy and similar topics on Medium: https://medium.com/@danielschonberger