2018 was a brutal year for JD.com (NASDAQ: JD), China's largest direct retailer and second largest e-commerce company. Its stock plunged about 50% on concerns about its slowing growth, escalating trade tensions, and a rape allegation against its founder and CEO Richard Liu.
JD now trades at just 0.4 times next year's sales. The company's problems -- exacerbated by the broader sell-off across the markets -- have kept investors away. However, five recent developments indicate that JD's stock could finally recover in 2019.
1. Liu won't be charged
Richard Liu was arrested in Minnesota on a rape allegation in late August, but subsequently released and allowed to return to China. His arrest briefly paralyzed JD, since Liu holds an 80% voting stake in JD and an unusual clause prevents the board from making any executive decisions in his absence.
Over the following months, it was unclear if prosecutors would formally charge Liu. However, the Hennepin County Attorney's Office recently dropped the case, citing "profound evidentiary problems," which clears the road for Liu to rebuild his personal reputation and JD's image in China.
2. A restructured business model
JD recently split its core JD Mall business into three divisions: a unit that analyzes customers' shopping habits and market shifts, another that provides services for customers, and a unit that will handle the platform's infrastructure, service support, and risk management services.
All three segments will report to Xu Lei, who became the rotating chief executive of JD Mall last year. This move should reduce JD's dependence on Richard Liu, and address the "key-person risk" that became painfully apparent after Liu's arrest.
The restructuring could also help investors gain clearer insights into the growth of JD Mall, which faced slower sales growth and declining operating margins in recent quarters. The split could also cast a brighter spotlight on JD's higher-margin Services revenue, which rose 49% annually and accounted for 10% of its top line last quarter.
3. An expanding ecosystem of services
JD is constantly expanding that Services ecosystem, which includes a Prime-like "JD Plus" membership platform with over ten million subscribers, integrated e-commerce and delivery services with Walmart (NYSE: WMT), "mini stores" on Tencent's (NASDAQOTH: TCEHY) WeChat, online ad sales, and JD Logistics, which provides delivery services for its own platform and other retailers.
Tencent and Walmart are notably two of JD's two largest stakeholders, and the three companies are all expanding their shared ecosystem to counter Alibaba, the 800-pound gorilla in China's e-commerce market. Expanding this ecosystem weighs down JD's near-term operating margins, but could lock in more customers and lead to stronger profit growth over the long term.
4. A $1 billion buyback
JD also recently announced that it would repurchase $1 billion in shares over the next 12 months. That won't significantly reduce its valuation, since $1 billion is only equivalent to 3% of JD's current market cap, but it's a vote of confidence for the company's future as its stock hits multi-year lows.
JD plans to fund the buyback with its existing cash. It finished last quarter with 42.9 billion RMB ($6.2 billion) in cash, cash equivalents, and short-term investments last quarter -- compared to 38.4 billion RMB at the end of 2017.
5. Analysts aren't giving up
Investors should take analysts' recommendations with a grain of salt, but positive notes often trigger bigger institutional buys. Of the 38 major analysts who cover JD, 15 rate the stock a "Buy", 22 consider it a "Hold", and one rates it as "Underweight". None of them have downgraded it to a "Sell".
Goldman Sachs analyst Ronald Keung also recently noted that JD is now a "profitable online retail business that has grown five-fold since its IPO four years ago to nearly 30% of Alibaba's GMV (gross merchandise volume) scale," and that its recent weakness was caused by softer cyclical consumer spending in certain categories and not fundamental problems with its core business.
The key takeaway
JD still has a lot to prove in 2019, but I think some of the headwinds are dissipating. If JD's revenue growth stabilizes and it demonstrates that its investments are paying off, we could see the stock recover some of its losses -- especially if trade tensions between the US and China finally wane.
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