The last 12 months were a good period in general for e-commerce stocks. Companies like Amazon, Shopify, MercadoLibre, and Pinduoduo saw their share prices rise at least 30%.
But the industry had its laggards too, including JD.com(NASDAQ: JD), which saw its shares fall 61% in the past year. With the stock now down 78% from its all-time high, JD.com has attracted some investors looking to take advantage of a potential bargain.
But before you rush into the stock, you should understand how JD.com got here in the first place. Only then can you make an informed investment decision.
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The rise of the Amazon of China
JD.com is one of the more successful companies replicating Amazon's playbook.
The e-commerce giant operates a first-party e-commerce business in China by selling a wide range of products directly to customers. It also operates a third-party marketplace that allows other sellers on its platform, in exchange for fees from each successful transaction.
The company emphasizes low prices to encourage customers to buy more over time, and it operates a complex logistics service to offer speedy deliveries. The low prices and fast delivery leads to strong customer retention and sales growth, providing JD.com with the scale needed to drive prices even lower and continuously improve its service.
Customers love the approach, which explains the company's uninterrupted growth for many years. For perspective, revenue grew revenue at a compound annual rate of 27% from 2017 to 2021. Everything seemed to be moving in the right direction until recently.
JD.com faces major challenges now
Investors accustomed to such an impressive track record were disappointed when the e-commerce company reported just 10% revenue growth in 2022. Subsequent months were even more challenging for the company with revenue growth declining to just 2% in Q3 2023. Revenue from its flagship first-party e-commerce business actually fell 1% year over year, masked by a 13% increase in service revenue.
To add salt to the wound, competitor PDD Holdings reported 94% top-line growth in the same quarter. Even Alibaba, which is facing its own challenges, reported 9% growth.
JD.com is failing to keep up with the competition. It didn't help that previous CEO Xu Lei stepped down from his post in May 2023 after just one year, adding another layer of uncertainty to the company's future.
The silver lining here is the fact the company is still profitable with a strong balance sheet. JD.com generated 39 billion yuan ($5.4 billion) in free cash flow in the 12 months ended Sept. 30, 2023. It also had 242 billion yuan ($33.2 billion) in cash and short-term investments. With this solid financial position, JD.com can continue to invest in areas like live-streaming shopping, supply chain improvements, and other initiatives.
Still, investors should be aware the path ahead remains challenging as it will have to outmaneuver rivals like Alibaba, Pinduoduo, and Douyin.
Is JD.com stock a bargain now?
So JD.com is at a crossroads. Despite its previous success, the future is far less certain now that it faces a more competitive industry and greater regulatory scrutiny.
Given the recent bearish sentiment, JD.com stock trades at a significant discount to other e-commerce companies with a price-to-earnings (PE) ratio is just 10.2, while Pinduoduo trades at 27.8 times earnings.
Investors should monitor JD.com's rebound efforts in the coming quarters for clues of its progress. If the company can defend its position as a top three e-commerce platform in China and rekindle growth, its current stock price should prove to be a bargain.
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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, JD.com, and Shopify. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
