Cautious On JD's Investment In Wish

| About: JD.com (JD)

Summary

JD reportedly invested $50m in US-based startup Wish.

The investment highlights Chinese ecommerce companies' ambition to expand in overseas market.

Product quality a key concern for Wish. Unless quality improves, JD is unlikely to benefit from Wish.

RE/Code reported that JD.com (NASDAQ:JD) made a $45-55m investment in online shopping startup Wish, making it the first overseas investment pursued by the second largest ecommerce company in China. Although the size of the investment represents roughly 1.5% of Wish's implied valuation of ~$3.5b, it highlights JD's overseas ambition as Chinese ecommerce companies look to expand beyond China's borders. It also illustrates that cross-border ecommerce will become increasingly important for Chinese ecommerce companies to maintain their current growth rates (see - Alibaba 2016 Outlook: The World Is Not Enough).

JD's investment in Wish follows Alibaba's (NYSE:BABA) prior establishment of 11Main, which the company later shut down. The key message here is that Chinese ecommerce companies are increasingly interested in expanding their ecommerce presence in the US. And M&A or strategic investment will likely to be the preferred method for this expansion. This also makes eBay (NASDAQ:EBAY) an attractive target for either BABA or JD as they look to create cross-border synergy between eBay and their own platforms.

Between BABA and JD, my preference remains BABA given the company's scale and market size. Although JD is growing at a faster rate than BABA, I am cautious on its medium-term outlook because of BABA's superior scale and larger logistics footprint (see - Alibaba: Still The Champ). However, JD's execution on cross-border logistics could make me change my view on the company should they make a transformational acquisition to expand its presence in the US.

Wish is unique in that it was built to be a mobile-first retail platform that focuses on discounted items. The app features a stream of product images that attract user attention and reasonable discounts to drive mobile purchases. More important, the company connects buyers directly to Chinese manufacturers, thereby cutting out the middlemen and driving cross-border ecommerce. Interestingly, most of Wish's users tilt toward the younger demographic from the heartland of the US. This is very similar to Wal-Mart's (NYSE:WMT) model except the business model is more ecommerce-driven and users are tech savvy and price conscious.

I think, over time, JD could potentially increase its investment in Wish and sell its product to Wish's core user groups, who are looking for low-priced electronics shipped directly from China. However, the issue with Wish is that product quality remains sporadic and users are often be disappointed with the quality. Unless the quality goes up, JD is unlikely to benefit from its investment in Wish, as the startup could collapse due to competition from Amazon (NASDAQ:AMZN).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.