Shares of China’s (FXI) tech giant JD.com (JD) are trading close to 3% higher in early market trading. The company announced its third-quarter results today. JD.com reported sales of $18.9 billion with an adjusted EPS of $0.29. Analysts expected the company to post sales of $18.13 billion and an EPS of $0.17 in the September quarter.
In the fourth quarter, JD.com forecast sales between 163 billion renminbi and 168 billion renminbi. The forecast is higher than the sales of 134.8 billion renminbi in the fourth quarter of 2018. The company’s forecast translates to sales between $23.26 billion and $24 billion in the December quarter. Meanwhile, analysts have forecast JD.com sales at $23.06 billion in the fourth quarter.
JD.com’s earnings and revenue beat and strong guidance are driving the stock higher today.
What impacted JD.com sales in Q3?
In the third quarter, JD.com’s sales rose 28.7% YoY (year-over-year), while its net services revenues rose 47.8%. The company’s operating cash flow rose close to 70% YoY to $4.3 billion in the trailing 12-month period. The free cash flow almost tripled to $2.2 billion.
JD.com’s annual active customer accounts rose to 334.4 million at the end of the third quarter—up from 321.3 million at the end of the June quarter. The mobile monthly active users rose 36% YoY. Notably, over 70% of the new customers were from lower-tier cities.
During JD.com’s earnings call, CEO Richard Liu said, “JD’s commitment to providing consumers with the best possible online shopping experience drove another strong quarter of growth. In particular, more and more consumers in China’s fast-growing lower-tier cities are turning to JD for our superior value and service. We will continue to invest in technology and innovation to meet the growing needs of Chinese consumers and businesses for fast and reliable e-commerce and supply chain solutions.”
In the third quarter, JD.com launched its social media e-commerce platform to gain traction in lower-tier cities. The growth potential in these regions is huge. China’s middle class continues to increase its purchasing power. The platform is known as “Jingxi” and integrates social media with online retail.
JD logistics and health
While JD.com’s primary business is the online retail segment, the company is expanding into other growth verticals. The JD Logistics business managed to improve efficiency in lower-tier cities. The company continues to expand its 24-hour delivery services in these regions.
JD.com aims to leverage AI technologies to optimize the expansion of its warehouse network. Currently, the company is able to deliver around 90% of its direct sales orders in under 24 hours, which is impressive. JD Logistics operated over 650 warehouses at the end of the third quarter totaling approximately 16 million square feet.
Another JD.com subsidiary is JD Health, which just closed its Series A funding. The subsidiary is valued at $7 billion. JD Health has successfully built a healthcare ecosystem and provides pharma and healthcare products. Notably, JD Health is China’s leading e-commerce company in the pharmacy space. The subsidiary benefits from JD.com’s strong brand value.
What next for JD.com and investors?
JD.com is trading at $34.5, which is close to its 52-week high of $35.43. However, the stock is still trading 31% below its record high. The company has been impacted by the ongoing trade war and a slowing domestic economy over the last 18 months.
While the stock fell more than 50% in 2018, it has made a strong comeback in 2019. JD.com shares have gained 62% year-to-date. In comparison, Alibaba (BABA), Sina (SINA), and Baidu (BIDU) have risen 36%, -39%, and -26%, respectively, in 2019. Can these stocks move higher since they started November on a strong note?
JD.com is looking to take advantage of market leadership and operational efficiency to keep product prices lower. The company has an opportunity to experience tremendous growth due to economies of scale in procurement.
The company increased its sales at an annual rate of 50% between 2012 and 2018. Analysts expect JD.com’s sales to increase 15.9% to $79.46 billion in 2019 and 17.3% to $93.22 billion in 2020.
The sales growth is also boosting the company’s profit margins. JD.com’s operating margin has risen from 0.6% in 2014 to 2.5% in the third quarter. Analysts expect the company’s earnings to rise 157% in 2019 and 37.8% in 2020.
If you compare the expectations to JD.com stock’s forward PE ratio of 27.8x, it’s undervalued. The company is valued at $50.3 billion in terms of market cap or 0.63x forward sales. The valuation is incredibly low for a company that’s growing its sales by double-digit percentages with impressive growth metrics.
Analysts have a 12-month average target price of $36 for JD.com stock, which is 4.4% above the current trading price.