JD.com (JD) has faced prolonged underperformance in its stock price since going public about ten years ago despite its remarkable top and bottom line growth during this period. This contrast has left investors wondering whether the stock can finally break free from this trend. Considering the company’s sustained momentum, as again highlighted by its Q2 earnings report, and the widening undervaluation gap as free cash flow surges, there is a strong potential for a turnaround. For this reason, I am bullish on JD stock.
The JD.com Enigma: Stellar Financials Haven’t Boosted Its Stock
Since JD’s IPO in 2014, the company has experienced enormous growth. Yet, its share price has remained essentially flat, creating an enigmatic situation for investors. For context, in 2014, the year JD went public, the company generated $18.5 billion in revenues. Since then, the company has consistently expanded its top line, reaching $152.8 billion by the end of last year (FY 2023).
This represents more than an eightfold increase in revenue, reflecting JD’s dominance in the e-commerce space and its ability to scale in the competitive Chinese online market. In the meantime, JD’s free cash flow (FCF) has also seen a significant, albeit volatile, upward trajectory.
Specifically, JD grappled with profitability challenges in earlier years, posting negative FCF as the company reinvested most of its operating cash flow into capital expenditures to drive expansion. Nevertheless, with JD finally fully leveraging China’s vast economies of scale and reaching a mature expansion phase, the company has shifted its focus, leading to a significant surge in free cash flow. Notably, JD generated an impressive $5.7 billion in FCF last year, with the company’s results during the first half of 2024 implying further gains this year.
When you look at these numbers, it’s difficult to understand how JD stock has underperformed so significantly. How can a company increase its revenues more than eightfold since its IPO and convert around 30% of its 2014 revenue into free cash flow by 2023 yet still see its stock trading at the same levels?
Potential Reasons for JD Stock’s Underperformance
If I had to pinpoint the potential reasons for JD stock’s underperformance, they would be the following: Firstly, the broader macro environment in China, which has been marked by a slowing economy, regulatory pressures, and geopolitical tensions, has dampened investor confidence. Secondly, JD faces intense competition from rivals like Alibaba (BABA) and PPD’s Pinduoduo (PDD), raising concerns about the sustainability of its growth.
The rather surprising news regarding Walmart (WMT) exiting its 9.4% stake in the stock has further rattled investors in recent days.
Nevertheless, with JD’s continued growth rejecting this narrative and a widening valuation gap improving the stock’s underlying margin of safety, I believe the current pessimism surrounding the stock will likely dissipate.
JD’s Q2 Results Reflected Continued Growth
JD.com’s Q2 2024 results underscored its sustained growth trajectory, positioning the company for another year of record-breaking revenues and free cash flow. In particular, JD generated revenues of $40.1 billion, fueled by strong performance across its core segments. Further, continued operational efficiencies drove a significant increase in adjusted operating income, reaching $1.6 billion, alongside a stable margin rise.
Therefore, JD.com’s adjusted net income margin expanded to 5% from 3% in the previous year. This propelled operating cash flow to $6.98 billion, a 29% increase from $5.43 billion last year. Consequently, free cash flow surged by over 45% to $6.82 billion. In case it wasn’t immediately clear, the free cash flow JD generated in Q2 2024 alone surpassed the total amount the company delivered over the entire last year!
The Valuation Gap Has Widened
With JD’s financials continuing to surge against a stagnant share price, the stock’s undervaluation gap has kept widening. It has now reached a silly point, which is why investors will eventually be forced to re-price the stock at a more reasonable level. This could prove a major catalyst for upside from the stock’s current price level, supporting my bullish view of the stock.
In particular, I believe the company will generate a free cash flow of roughly $8 billion this year. It’s crucial to note that the company experienced negative free cash flow in Q1, primarily due to changes in accounts payable. This explains my seemingly conservative estimate against JD’s strong free cash flow performance in Q2. In any case, this estimate implies JD is trading at 4.9 times its free cash flow, which is undoubtedly a crazy-low multiple, given the company’s underlying growth and position in China’s e-commerce space.
Is JD.com Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, JD scores a Strong Buy consensus rating based on 10 Buys and three Holds assigned in the past three months. At $38.58, the average JD stock forecast implies 49.5% upside potential.
If you’re unsure which analyst to follow when buying and selling JD stock, consider Jialong Shi from Nomura. Over the past year, Shi has been the most accurate and the most profitable analyst for this stock, delivering an average return of 17.72% per rating with a 52% success rate.
Takeaway
JD continues to demonstrate remarkable growth. However, its stock price remains stagnant, puzzling investors. Despite macroeconomic challenges and intense competition, JD’s sustained revenue and free cash flow growth defy the prevalent pessimism surrounding the stock. Simultaneously, the widening undervaluation gap suggests the market may soon revalue the stock, which will likely create a significant opportunity for upside. Accordingly, I remain bullish on JD stock and anticipate that there will be a positive shift in investor sentiment.
