Shopify (NYSE:SHOP) and China’s JD.Com (NASDAQ:JD) are among the names in this category. Unbeknownst to some — due in large part to the sprawling nature of Alibaba’s business model — JD is one of China’s largest dedicated e-commerce companies. And JD.com has outperformed its larger rival by about ten percentage points this year.
With JD stock up 69% in 2019, it’s appropriate to wonder how much more gas is left in the tank. The good news is that, while JD stock may not replicate its 2019 performance in 2020, betting on more gains by JD.com isn’t a far-fetched idea.
JD stock lures investors because, as an e-commerce name, it operates in a growth arena. Plus, its share price appreciation gives it the feel of a growth stock. More importantly, JD.com is a growth company with a balance sheet that would make many other growth names, foreign and domestic, green with envy.
“JD.com’s liquidity remains strong, with RMB56.6 billion (around $8.2 billion) in cash, cash equivalents and short-term investments as of the end of September 2019 and no debt maturing over the next 12 months,” Moody’s Investors Service wrote in a recent note. “Moody’s expects JD.com’s planned capital spending and investments will be adequately covered by its cash reserves and estimated operating cash flow of around RMB20 billion-RMB25 billion ($2.9 billion-$3.6 billion) over the next 12 months.”
In other words, JD’s cash hoard of $8.2 billion is about 17% of its market capitalization. That’s a trait that many investors arguably do not fully appreciate.
A Smart Strategy
One of the primary reasons for embracing stocks like BABA and JD is the sheer mass of China’s e-commerce market. The country has more internet users than the U.S. has citizens, and its middle class is continuing to grow. However, those factors are already baked into JD.com stock. It’s time for management to generate some fresh catalysts.
And that’s exactly what management is doing. The company is boosting its customer base and focusing on opportunities in smaller, but still growing, Chinese metropolitan areas.
“Encouragingly, we see JD’s ability to attract more users from lower-tier cities and its enhanced relationship with suppliers solidifying its online retail market positioning,” Citigroup analyst Alicia Yap said in a recent note.
Integral to the long-term thesis for JD stock is the company’s ability to expand its margins while keeping its fulfillment spending under control. The outlook on both fronts appears to be encouraging. Morningstar estimates that in the next decade, operating margins should expand to 4.7%. That’s up from 0.4% in 2018. The same researcher also sees it starting to rein in fulfillment spending.
The Bottom Line on JD.com
Still looking for more to love about JD.com? Well, it’s making a foray into luxury brands through partnerships with Armani, DKNY and Prada. The company’s Fashion and Lifestyle unit — which still generates insignificant revenue — runs this endeavor. However, thanks to these new partnerships, the unit has meaningful growth potential.
Investors shouldn’t overlook JD’s luxury play as a possible catalyst for JD stock. By some estimates, more than half the Chinese consumers who are likely to buy those glitzy products live in the aforementioned “lower-tier” cities. Don’t forget that’s where JD.com is currently taking steps to raise its market share.
Given the company’s strong balance sheet and its new business initiatives, JD stock could hit the mid-$40 range next year. It just needs to boost its margins and keep a lid on costs.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.