2 Reasons to Keep an Eye on JD.com Stock

Like many China-based companies, JD.com (JD -1.60%) has had a challenging time over the last few years. Geopolitical tension between the U.S. and China, the Chinese government’s crackdown on its tech sector, and the economic impact of COVID-19 are only some of the issues that Chinese tech stocks have faced.

But those willing to think long term may see the latent potential in some of the region’s biggest names, including JD.com.

A solid track record of execution

Alibaba, which operates the largest e-commerce platform in China, may be best-known to American investors as the “Amazon of China,” but the company is much more reliant on the third-party sellers in its marketplace. Direct sales make up just a small sliver of Alibaba’s gross merchandise volume, whereas Amazon has a substantial first-party business.

As a result, the better comparison lies with JD.com. Like Amazon, JD.com focuses on selling low-priced products and delivering them quickly to customers. To do so, it runs an integrated retail operation, from selling to warehousing and logistics, which gives it nearly complete control of the customer experience. Thanks to its growing scale and operating leverage, it can pass savings on to its customers through low prices.

Low prices and a pleasant shopping experience keep customers coming back, growing the entire platform over time. Put it all together, and the company enjoys a virtuous cycle of lower costs, lower sales prices, and higher volumes. This is evident in the company’s adjusted net profit margin, which has increased from 0.7% in 2018 to 3.2% in 2023. Over the same period, revenue grew at a compound annual rate of 19%.

With the growing success (and profitability) of its e-commerce business, JD.com has also expanded into new areas like logistics, healthcare, and fintech, among other segments. These investments open up the tech giant to new opportunities, especially as competition in the e-commerce industry intensifies thanks to the rise of platforms like Pinduoduo and Douyin.

An attractive valuation

Owning Chinese stocks in the last few years has been disappointing for many investors. Even shares of leading companies like JD.com and Alibaba are down approximately 75% from their peak.

The combination of growing top and bottom lines and a beaten down share price has left JD.com stock with a very attractive valuation. For instance, its price-to-sales (P/S) ratio stands at 0.27, a massive discount from its five-year average of 0.99. Similarly, its price-to-earnings (P/E) ratio is 11.7, significantly lower than its five-year average of 83.0. These figures stand out even more when compared to its U.S. counterpart — Amazon trades at P/S and P/E ratios of 3.5 and 54.5, respectively.

On a macro level, JD.com stock carries a discount due to the uncertainty weighing on many of the companies based in China. Bears are also concerned about company-specific risks, such as increased competition in the Chinese e-commerce industry. JD.com saw its revenue growth rate fall to a multiyear low of 3.7% in 2023 due to heightened competition and a weak economic environment.

Though there is currently negative sentiment around Chinese stocks, there is no reason to believe it will last forever. And JD.com specifically has seen its growth begin to rebound with first quarter revenue up 7% as the company adapts to the new industry environment. Under CEO Sandy Ran Xu, who took the reins in May 2023, the company is improving user engagement with lower prices, offering new services, and enhancing its livestream shopping experience.

With JD.com stock trading near multiyear low valuations, investors can get the attractive combination of a high margin of safety and high upside potential.

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.