JD.com Defies the Bears With Another Quarter of Robust Growth

China’s biggest direct retailer continues to grow its revenue and margins.

Shares of JD.com (NASDAQ:JD) recently surged to a 52-week high after the company’s fourth-quarter numbers dazzled investors. The Chinese e-commerce company’s revenue rose 26.6% annually to 170.7 billion yuan ($24.5 billion), beating estimates by about $600 million.

On a non-GAAP basis, the company’s operating income surged 125% to 704 million yuan ($101.1 million), while its net income grew 8% to 810.7 million yuan ($116.5 million), or 0.54 yuan ($0.08) per ADS, which topped expectations by two cents. On a GAAP basis — which includes stock-based compensation, investments, divestments, and other one-time adjustments — it posted a net profit of 3.6 billion yuan ($500 million), compared to a net loss of 4.8 billion yuan a year earlier.

Those robust growth rates crushed the bearish notion that JD’s growth would decelerate as it lost ground to rivals like Alibaba and Pinduoduo. JD’s stable earnings growth also indicated that its scale, along with its infrastructure and logistics investments, are paying off.

The key growth rates

JD’s number of annual active customers grew 18.6% annually to 362 million in the fourth quarter, marking its biggest quarterly gain in three years — 70% of those new customers came from lower-tier cities, which indicates that it’s successfully countering Pinduoduo’s aggressive courtship of lower-income shoppers. Big promotions, including the Singles Day shopping festival on Nov. 11, also boosted JD’s revenue.

YOY growth Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019
Annual active customers 4.4% 2.9% 2.4% 9.6% 18.6%
Revenue* 22.4% 20.9% 22.9% 28.7% 26.6%


Those promotional strategies throttled its gross margin expansion, but they didn’t dent its operating margin, thanks to tighter cost controls, the automation of its logistics network (which it also offers to other companies as a service), and its massive scale — which includes over 700 warehouses, 28 front distribution centers, and fulfillment centers across seven major cities, which serve “almost all” counties and districts across China.

JD’s adjusted operating margin at its core marketplace business, JD Retail, rose 90 basis points to 2.5% for full-year 2019. Its total non-GAAP operating margin expanded 110 basis points to 1.5% for the same period.

Those improvements enabled JD to end 2019 with a positive free cash flow of 19.5 billion yuan ($2.8 billion), marking a record high and a significant improvement from its negative cash flow of 7.9 billion yuan ($1.1 billion) in 2018. During the earnings call, CFO Sidney Huang stated that “JD.com finished a remarkable year with robust revenue growth, solid profitability and free cash flow, and most importantly, accelerating user growth.”

A stable long-term outlook

Like Alibaba, JD warned that the ongoing coronavirus crisis would throttle its growth. However, it still expects its revenue to rise “at least” 10% year over year in the first quarter.

Huang stated that JD’s logistics network resumed operations “very quickly” after the Chinese New Year but warned that sales of its large-ticket durable goods and discretionary products — which generate higher-margin revenue — were slowing as shoppers pivoted toward lower-margin groceries and household necessities.

That shift will likely weigh down the company’s near-term margins, but Huang declared that JD would likely resume its “robust growth momentum” and “improving margin trend” after the outbreak ends. JD Retail CEO Lei Xu also observed that some of JD’s inactive users were becoming active again as brick-and-mortar stores remained closed and smaller e-commerce marketplaces struggled to restart their businesses.

JD’s services revenue, which rose 44% during the fourth quarter and accounted for 12% of its top line, should also keep rising as it provides logistics, advertising, and additional services to other companies.

A low valuation with plenty of upside potential

JD’s stock already rallied nearly 25% year to date, but the stock is still valued at less than one time its annual revenue. JD consistently generates double-digit revenue growth and is finally squeezing out stable profits, so that valuation seems ridiculously low relative to those of its peers. Alibaba trades at over eight times trailing 12-month sales, and Pinduoduo has a price-to-sales ratio of 10. If investors flock back to Chinese stocks after the coronavirus outbreak ends, JD could easily outperform those rivals and hit fresh highs.

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