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2 reasons to keep an eye on JD.com stock

Contrarian investors could find value in this Chinese technology giant.

Like many China-based companies JD.com (JD -1.60%) has had a difficult time in recent years. Geopolitical tensions between the US and China, the Chinese government’s crackdown on the Chinese technology sector, and the economic impact of COVID-19 are just some of the issues Chinese technology stocks have faced.

However, those who think long-term may see the latent potential of some of the region’s biggest names, including JD.com.

A solid track record of implementation

Alibaba, which operates the largest e-commerce platform in China, is perhaps best known to American investors as “Amazon of China,” but the company is much more dependent on third-party sellers in its marketplace. Direct sales make up only a small portion of Alibaba’s gross merchandise volume, while Amazon has a significant first-party business.

The better comparison is therefore with JD.com. Like Amazon, JD.com focuses on selling low-priced products and delivering them quickly to customers. To do this, the company runs an integrated retail operation, from sales to warehousing and logistics, giving it almost complete control over the customer experience. Thanks to its growing scale and operating leverage, it can pass savings from low prices on to its customers.

Low prices and a pleasant shopping experience keep customers coming back and the entire platform growing over time. All in all, the company benefits from a virtuous cycle of lower costs, lower selling prices and higher revenue. This is reflected in the company’s adjusted net profit margin, which has increased from 0.7% in 2018 to 3.2% in 2023. During the same period, revenue grew at a compound annual rate of 19%.

With the growing success (and profitability) of its e-commerce business, JD.com has also expanded into new areas such as logistics, healthcare and fintech. These investments are opening up new opportunities for the tech giant, especially as competition in the e-commerce industry intensifies thanks to the rise of platforms such as Pinduoduo and Douyin.

An attractive valuation

Owning Chinese stocks has been disappointing for many investors in recent years, with even shares of leading companies like JD.com and Alibaba down about 75% from their peak.

The combination of rising sales and profits and a falling share price has given JD.com stock a very attractive valuation. The price-to-sales ratio (P/S) is 0.27, a massive discount to the five-year average of 0.99. Likewise, the price-to-earnings ratio (P/E) is 11.7, well below its five-year average of 83.0. These numbers are even more striking when compared to its US counterpart – Amazon trades at P/S and P/E ratios of 3.5 and 54.5 respectively.

On a macro level, JD.com stock is at a discount due to the uncertainty that weighs on many China-based companies. Bears are also concerned about company-specific risks, such as increasing competition in China’s e-commerce industry. Due to increasing competition and a weak economic environment, JD.com’s revenue growth rate in 2023 fell to a multi-year low of 3.7%.

While there is currently negative sentiment towards Chinese stocks, there is no reason to believe it will last forever. And JD.com in particular has seen its growth pick up again, with revenue up 7% in the first quarter as the company adapts to the new industry environment. Under CEO Sandy Ran Xu, who will take over in May 2023, the company is improving user engagement through lower prices, offering new services and improving its livestream shopping experience.

With JD.com stock valuation close to multi-year lows, investors can benefit from an attractive combination of high margin of safety and high upside potential.

John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. Lawrence Nga holds positions in Alibaba Group and PDD Holdings. The Motley Fool holds positions in Amazon and JD.com and recommends these companies. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.

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