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Due to its fantastic e-commerce growth and top-notch logistics infrastructure, the company is often referred to amongst investors as the Amazon (NASDAQ:AMZN) of China. The company’s superior network and customer experience are evident in its rapidly growing loyal customer base, which has expanded rapidly over the past few years. JD numbered 305.3 million, 362.0 million, and 471.9 million annual active customer accounts in 2018, 2019, and 2020, respectively.
Now the thing is that being a Chinese company, JD has suffered lately, along with the rest of its Chinese peers, due to China’s crackdown on big tech. The stock has declined from its past highs of around $108, back to around $78 as of this writing, as a result. While investors should be wary of the ongoing concerns, I believe that the overall risks have likely been exaggerated by the market. I have discussed this in my latest Alibaba (NYSE:BABA) article, which you can read here.
In my view, while there are some risks attached to Chinese equities in general, including little to no international shareholder say on how the businesses are run, there are many opportunities out there to be taken advantage of following the recent slide, and JD is one of those. The company has been growing rapidly, and its current valuation hardly reflects its future prospects.
JD Q2 results came in rather strong, despite the ongoing concerns. JD’s revenues rose 26% year-over-year from RMB201 billion in Q2-2020 to RMB254 billion in Q2 2021. For the quarter, JD’s non-GAAP adjusted net profit declined by around 22%, from RMB5.9 billion to RMB4.6 billion. However, this should hardly bother investors, as the company is purposefully posting losses to reinvest in its future growth, much like Amazon did over the past decade to expand its business.
As long as the company keeps growing its revenues and hence bringing in higher potential profits, it should be on the right track. JD is expected to grow sales by around 20% in the coming years. Assuming annual revenues of around $300 billion by 2025 as per analyst estimates, a 5% net profit margin should imply a net income of $15 billion.
In other words, at JD’s current market cap, the stock is trading at 8.1 times its potential FY2025 net income, which is a rather attractive multiple, while also recognizing that there is indeed speculation in this statement. Nonetheless, even with prudent estimates in terms of growth and JD’s potential net margin, the stock is undervalued against its future potential net income.
Wall Street’s Take
Turning to Wall Street, JD has a Strong Buy consensus rating on the stock, based on 11 Buys, zero Holds, and one Sell assigned in the past three months. At $97.50, the average JD price target implies 24.5% upside potential. For this reason, I am bullish on the stock.
Disclosure: Nikolaos Sismanis did not have a position in JDshares at the time of publication, but had a beneficial long position in the shares of BABA through stock ownership.
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