Is JD Stock Overvalued?

Is JD Stock Overvalued? The trade relationship between China and the United States has been full of tension for the past few years. That’s made some investors wary of purchasing Chinese stocks.

However, the 2020 e-commerce boom gave the biggest online retailers a boost, and JD.com is no exception. Its impressive growth over the past two quarters has even the most risk-averse traders ready to buy. 

JD.com is widely referred to as the Amazon of China, and the similarities between these two companies are uncanny. JD sells an astonishing array of merchandise to consumers directly as Amazon does, and it serves as a go-between for third-party sellers to reach JD.com buyers. 

Like Amazon (AMZN), JD.com has created its own expansive delivery system that reaches deep into underserved areas of the country. With businesses closed due to COVID-19, JD.com has never been more popular.

Finally, JD.com has taken a page from the Amazon playbook with an Amazon Prime-like loyalty program. It’s the first program of its kind in China, and in its five years, it has attracted more than 20 million members. 

JD.com share prices barely dipped at the height of the pandemic in China, and the US market crash was all-but-invisible with this stock.

In fact, it has increased steadily over the course of the year, leading some investors to wonder whether there is any room left to grow. The question is this: Is JD stock overvalued? If not, is this the right time to buy?

Why JD Stock Went Up

It’s true that Chinese consumers have relied on e-commerce more than ever during this past year, and that has contributed to revenue growth. However, that isn’t the only reason JD.com stock went up. It’s a company with a long-term strategic growth plan, and it is executing on each element decisively.

Instead of focusing on profitability one quarter at a time, JD has invested in infrastructure and expansion. Building out its delivery network might have depressed profits for a period, but now that it is established, JD has a nearly insurmountable competitive edge. 

JD.com has gone beyond traditional e-commerce by launching healthcare and grocery divisions, and it has a robust research and development arm that looks to design and deliver technological advances. That, combined with a passion for customer care, has cemented JD.com’s place in the Chinese marketplace. 

The recent growth in share prices resulted from the impressive results JD achieved in the past two quarters, and those results can be linked to increased use of e-commerce due to the pandemic.

However, it’s safe to say that JD.com was only able to benefit from the COVID economy because of the resources it had already invested in creating a one-stop e-commerce platform.

JD Financials Showed Lower Margins But Fast Growth

JD.com posted third-quarter results that impressed even the most optimistic analysts. Revenues went up by 29 percent year-over-year for a total of $25.7 billion.

That’s a full $610 million more than experts had predicted. Adjusted net income increased 80 percent to a total of $0.8 billion. That translates into $0.50 per share – nine cents more than expected. 

The increased earnings contributed to a 93 percent rise in trailing 12-month free cash flow. That figure totaled $4.5 billion at the end of the quarter. Better still, cash and equivalents are up 98 percent, totaling $10.8 billion. 

That’s important for two reasons. First, given the company’s commitment to investing in its business, the dramatic rise in free cash flow and cash demonstrates that many of the major infrastructure projects are complete.

Second, it means the JD.com has plenty of flexibility to invest in new opportunities that will grow and expand the business further. 

Is JD Valuation Too High?

JD.com’s valuation has roughly tripled in the past year, which has new investors asking whether JD’s valuation is too high.

The answer is not quite as straightforward as one might hope. Based on JD’s strong performance and the prospect of additional growth in revenues and profits over the next 12 months, JD’s current valuation is appropriate with perhaps upside according to a discounted cash flow forecast analysis.

However, that doesn’t mean this is the right time to buy. 

For the moment, the company’s success in 2020 and high expectations for 2021 are already incorporated into current share prices. That means there isn’t a lot of room for new investors to see short-term returns.

Analysts generally agree that a market correction is coming, which could bring stock prices down across the board. Those who are willing to wait a bit for that correction might get a better deal on JD.com shares. 

Will JD Stock Drop?

The world economy has had a volatile year, and until the pandemic is fully extinguished, anything can happen. That alone is reason to suspect that JD stock may drop in coming months.

However, the real concern is related to legislation moving through the US Congress. If it is passed, Chinese companies will be required to comply with the same sorts of financial audits that US companies do. 

To date, the Chinese government has flat-out refused to support such measures, and that presents quite a conundrum. If the regulations are made law and Chinese companies decline audits, they will be delisted from US stock exchanges. 

This issue has already impacted JD.com share prices, which go down a bit each time the bill gains momentum in Congress. This issue presents the greatest risk that JD stock faces in terms of future price drops.

Is JD Stock Overvalued? The Bottom Line

The bottom line is that JD.com stock isn’t especially overvalued, but expectations for future growth are already included in share prices.

That fact, in conjunction with potential volatility due to changes in the regulatory environment, makes JD.com a less desirable choice at this time. 

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.