JD.com Earnings Can Improve Despite China's Economic Struggles
With better-than-expected earnings results released from Chinese e-commerce giant Alibaba (BABA) - Get Report , it would seem that concern about slowing economic growth in China has not impacted consumers' online shopping habits.
China's e-commerce seems to be in the early stages of development, according to investment firm Morgan Stanley. And it makes sense to place a long-term bet here on JD.com (JD) - Get Report , which has quickly built itself into a premier Chinese online electronics retailer.
JD.com, headquartered in Beijing, reports third-quarter fiscal 2015 earnings results before the opening bell Monday. Its shares -- despite being up some 26% on the year to date and 5% in the past 12 months -- have lost some steam. For the past six months, JD.com stock has lost more than 12% of its value, compared to 6% six-month declines for Alibaba. And it's for this reason, among others, that JD.com stock has much less risk now than before.
Fiscal 2015 revenue for the year ending in December is projected to grow 55% year over year to $178 billion, JD.com is positioning itself to capture a huge chunk of an estimated $3 trillion Chinese e-commerce market. Despite rising competition from Alibaba, analysts on average expect JD.com to remain a threat.
JD.com stock also has a consensus buy rating from analysts and its average analyst 12-month price target is $37.45. The stock currently trades around $29.
The company is projected to grow earnings at an average annual rate of 73% in the next five years. This would be about 50 percentage points higher than Alibaba, which is projected to grow earnings at a five-year rate of 23%.
The reason for the optimism? JD.com is growing its merchandise volume at impressive rates (up 82% year over year in the second quarter). And its costs of revenue -- while also growing -- are increasing more slowly than the growth rate of revenue, at 57% vs. 61%.
This means that JD.com is getting better gross margins on the products it sells even as it continues to spend money on things like fulfillment infrastructure to grow its capacity. But its capital expenses, including an 86% year-over-year increase in second-quarter marketing expenses and a 67% jump in general and administrative costs, have scared off some investors in the past six months.
Yet China's e-commerce market is projected to grow to $3 trillion, accounting for 18% of the country's retail sales by 2018, according to Morgan Stanley. So, it makes sense for JD.com to invest now to profit off of that growth later.
In that vein, investors should be patient with JD.com stock in light of its recent pullback.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.