JD.com: Stock of the Week

Key Takeaways for JD.com 

- While JD.com has a 4-star rating, investors should understand the e-commerce competition before investing in it.  

-We've trimmed the profit growth estimate for JD.com from 6% to 3% for the next decade. 

- Our top pick in this segment remains PDD, a bargain deal e-commerce platform.

Chinese consumers are now focused on getting value for their hard-earned money. While this frugality might be great for frugal shoppers, it is not the best outcome for Chinese e-commerce platform JD.com (09618, JD). The company finds its shares deeply undervalued, but this does not mean it is an automatic ‘Buy’. 

Investors should understand the competition landscape, and the reasons why the JD.com stock is so cheap. 

Why JD Hits Speedbumps

In short, JD is facing two challenges. 

- For one, its first-party business, which focuses on wholesale vendors, has prioritized high quality products. While its efficient delivery network ensures prompt service, this focus on quality has also resulted in higher retail prices compared to other platforms. 

- Secondly, JD.com’s third-party business involves brands selling directly to consumers. Historically, JD.com has excelled in home appliance sales. However, given the modest recovery expected in the property market in the medium to long term, there will be a cap on this growth area on JD. These factors have led to an adjustment in JD’s annual profit growth estimate, which has been halved from 6% to 3% for the next decade. 

In our opinion, PDD (PDD) will be a top choice, followed by their primary competitor, Alibaba (09988, BABA), as the company have made significant progress in their low-price strategy.

 JD.com Bulls Say

- JD.com's nationwide distribution network and fulfilment capacity will be extremely difficult for competitors to replicate.

- As its first-party business gains scale, cost advantage will lead to lower sourcing costs and higher margins.

- JD is now the largest supermarket in China; high-frequency FMCG categories have attracted new customers from less developed areas and can drive purchase of other categories.

 JD.com Bears Say

- The new everyday low-price strategy, reorganization, and restructuring of the first-party business in 2022 will lead to weak growth in the medium term.

- Fulfilment infrastructure could be costly to operate, especially as the company penetrates lower-tier cities with lower disposable incomes and population densities.

- Increasing e-commerce competition, such as that from short video platforms, might weigh on JD.com's growth and profitability.