JD.com (JD) stock has recorded a remarkable rally, surging 82% from last month’s lows. In line with most other Chinese tech and e-commerce stocks, this rebound has been powered by a monumental move from the People’s Bank of China (PBOC), which unleashed an RMB800 billion ($114 billion) lending pool earmarked for China’s capital markets. This injected significant liquidity and bolstered investor sentiment in the region. Despite the recent rebound in its share price, I am bullish on JD stock given its valuation seems attractive even after this tremendous rally.
Momentum Remains Strong Despite Stimulus-Fueled Rally
Before I explain why I believe the recent stimulus could positively impact JD’s financials, it’s crucial to note that the company’s overall momentum remains strong, independent of any external support. This is a key reason I feel bullish on JD in the first place. Specifically, the company’s most recent Q2 results highlighted its sustained growth trajectory, positioning it for yet another year of record-breaking revenues and free cash flow.
To recap, JD generated Q2 revenues of $40.1 billion, up 1.2% from the previous year. This uptick came despite headwinds in some of its core categories, particularly Electronics and Home Appliances, which saw a modest decline due to a high base effect and restrained promotional activities. General Merchandise revenue, however, rose by 8.7%, powered by the strong performance in the Supermarket category, which delivered double-digit growth.
Operational efficiencies were also a key driver of JD’s recent success. The company posted an adjusted operating income of $1.6 billion, while its adjusted net income margin expanded to 5%, up from 3% in the previous year. This significantly boosted free cash flow, which surged by over 45% to $6.82 billion. Impressively, the free cash flow generated in Q2 alone surpassed the company’s total free cash flow from last year, clearly illustrating JD.com’s focus and success in scaling efficiencies and driving profitability.
How China’s Stimulus May Further Boost JD.com’s Financials
While the recent rally in JD.com stock has been propelled by improved market sentiment following the PBOC’s liquidity injection, the broader economic stimulus has the potential to improve the company’s financials. The RMB800 billion fund aimed at bolstering China’s capital markets has not only lifted investor confidence but it is also likely to stimulate consumer spending and demand for e-commerce services, both of which JD.com is well-positioned to capitalize on.
For JD.com, which is deeply embedded in China’s retail ecosystem, increased liquidity could translate to greater consumer spending power, especially as disposable incomes rise. This scenario would drive higher order volumes across its platform, particularly in categories like General Merchandise and Supermarket, which are already experiencing strong growth. In addition, JD.com’s competitive pricing strategy, built on its supply chain efficiency rather than aggressive subsidies, should allow the company to capture more market share as consumer spending increases.
Moreover, JD’s logistics arm is also poised to benefit from this stimulus. Due to the improved economic environment and overall investments in China’s infrastructure, JD Logistics should be able to upgrade its operational network, expand services, and attract more third-party merchants. The added liquidity could also stimulate growth in JD’s high-margin service businesses, like advertising and marketplace services, with the stimulus potentially raising corporate budgets. In turn, this should further bolster JD’s earnings growth potential.
JD.com Stock Remains Attractively Priced
Despite JD.com’s recent rally, I believe the stock remains attractively valued. Shares are currently trading at just 11.8x this year’s expected earnings per share (EPS), which is still well below the multiples seen in the stocks of counterparts across the ocean in America. This low valuation comes despite JD’s continuous revenue, earnings, and free cash flow growth. In fact, JD’s EPS is anticipated to increase at a CAGR of roughly 13% over the next five years, further underscoring today’s discount.
Certainly I agree that Chinese equities warrant a discount to account for their greater risk exposure. Nevertheless, a low-teens multiple for a leading player with snowballing earnings and free cash flow seems unjustifiably low, especially given the recent developments.
Is JD.com Stock a Buy, According to Analysts?
Looking at Wall Street’s view on the stock, JD continues to boast a Strong Buy consensus rating based on 10 Buys and three Holds assigned in the past three months. However, at $41.91, the average JD stock price target implies about 5% downside potential.
If you’re unsure which analyst to follow when buying and selling JD stock, consider Thomas Chong from Jefferies. Over the past year, Thomas has been the most accurate analyst for this name, featuring an average return of 25.91% per rating with a 58% success rate.
Investment Conclusion
JD’s ongoing momentum, independent of external factors, positions it for lasting growth, as evidenced by its latest results. At the same time, the recent Chinese stimulus program could boost JD’s revenue and earnings further by boosting consumer spending and benefiting its logistics arm. Consequently, despite its 82% share price rally, I believe JD stock continues to trade at a discounted valuation that leaves the opportunity for further upside potential.
