JD.com has been a beneficiary of China’s recent blockbuster rally that saw the markets experience the biggest single-week gain since 2008. The rally was induced by a rate cut by the People’s Bank of China.
Over the past two weeks, JD is up 55%. At this stage, many are calling for caution as the boom could turn to bust as quickly.
An economist at the Japanese investment bank Nomura, Lu Ting, is drawing parallels to the 2015 boom and bust cycle.
He believes the optimism among the public is justified, but the government should be careful not to fuel that optimism.
Given the current market momentum and our tracking of sentiment on China’s social media, the risk of repeating the epic boom and bust in 2015 could rise rapidly in coming weeks.
The rally in China’s US-listed stocks has already resulted in about $7 billion in losses for the US investors.
One might think that at this point, the rally is done, or at least ready for a slight correction.
It is hard to predict where the market will go, but when investing in a stock like JD, it is worth looking at the fundamentals to see if there is more upside.
Retail segment expected to grow
The first reason to be optimistic about the stock’s rally continuing is China’s retail sector.
China is going through that phase of the economic cycle where things look like they won’t ever get better.
But analysts are expecting the retail sector to rebound quickly.
Some are even calling for a mid-double-digit CAGR from now till 2030.
If that materializes, JD will easily be able to improve in topline, something all retailers are struggling with at the moment.
If, on top of this growth, JD is also able to obtain market share from struggling retailers, it would be icing on the cake.
JD’s margin improvement still to come
JD’s gross profits are hovering around 15% while operating profits remain at just above 3%.
These margins are the norm in the retail sector, but when one looks at JD’s competitors, they continue to enjoy much higher margins.
This isn’t necessarily a bad sign. JD is investing heavily in its own logistics network.
This includes investments in technology, warehouses, and delivery infrastructure.
Unlike its competitors that merely act as the intermediaries between the buyers and sellers, JD wants to own the whole operation.
Despite all this, the company’s margins have been in a consistent uptrend for nearly a decade now.
If this continues, JD stock will have enough cushion to continue rallying.
JD.com buybacks
JD has doubled down on its buybacks recently. At the current rate, JD is on track to buyback 18% of its outstanding shares in a single year!
It would be foolish to expect any significant continuation of this buyback rate.
It is likely to slow down as the price of the stock continues to rise.
However, it must be mentioned that the company recently approved a new $5 billion buyback plan for the next 3 years.
The current rally may prompt the company to slow down with its buyback.
However, the company has made its intentions clear by continuing a buyback program focused on the long term.
Despite many cautioning the recent rally in Chinese stocks could be about to go bust, there are good enough reasons for JD to continue rallying.
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