Made famous by Phil Fisher, the scuttlebutt analysis has served to help investors all over the world to buy the next GREAT company. I have done the analysis on JD.Com (JD) using a scuttlebutt method.
Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
As a percentage of TAM (total addressable market), JD is currently the second largest e-commerce retailer behind Alibaba's Taobao (eBay like business) and Tmall (JD's direct competitor). Going forward, JD's sales are expected to grow ~50% for 2016 and ~43% for 2017. As a total percentage of TAM in 2020, JD could grow to $150 - $200 billion in revenue.
Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
JD has launched new initiatives each year to capture market shares in industries that it has a potential in. Recently, JD launched a consumer/business financing department where it will provide short-term loans to consumers and businesses.
JD has also launched partnership malls with established brands to capture a broader segment of the online shopping market.
Management is always on the lookout for future opportunities as it has the platform to execute on many of these initiatives.
As Richard said, "It's the platform's value that will thrive one day."
How effective are the company's research and development efforts in relation to its size?
R&D has been effective for JD as it continues to capture a larger segment of the market share through its user friendly website and mobile app. As of Q3 2015, 70% of orders were purchased through mobile devices given ways for the success of JD's R&D team.
Does the company have an above-average sales organization?
Similar to Amazon, JD leverages its platform to execute its sales strategies. This allows tremendous amount of operating leverage as one platform can deliver the capabilities of millions of sales people.
With respects to the customer facing aspect of the business, JD has an above-average delivery staff. Given the rigorous company quality compliance, each delivery person has standards he/she must adhere to. Failure to comply with the protocols or receive two complaints in a quarter, the delivery personnel would be terminated.
Does the company have a worthwhile profit margin and ROIC?
Currently, JD does not produce a profit. In the long run, Richard believes JD will only target a 3%-5% profit margin. Similar to Costco, JD's goal is to provide customers value propositions that will keep them in the long run. I have modeled a 3% profit margin in 2020.
What is the company doing to maintain or improve profit margins and ROIC?
JD continuously invests in logistical infrastructure, supply chain management tools, and technology to insure that it's the market leader in e-commerce. Because of these strategic initiatives, JD was able to deliver 90% of its goods sold in Q3 2015 on the same day. No other e-commerce retailer was able to do this. This enabled JD to continue to grow its market share over competitors while simultaneously capturing a larger pie of the overall e-commerce market. I believe this edge will prove over the long run in JD's market share gains, and its dominance over competitors.
Does the company have outstanding labor and personnel relations (what is the dynamic with organized labor)?
One of JD's competitive advantages is its outstanding ability to recruit and retain talented employees. JD's training program alongside the potential to grow gives employees resources to want to excel. JD also pays its delivery personnel double the salary of the market wage in order to keep high quality talent alongside keeping employee turnover low.
What are management's incentives?
Richard receives a salary of $1 a year, and his stock options package is a 10-year agreement with an exercise price of ~$33 per share. Alongside his significant holding in JD (558.8 million shares), Richard's incentives are full aligned.
Does the company have quality depth to its management (key-man risk)?
JD has an extensive personnel training program. Each year, JD would recruit 100 college students from all over China with a tough family background. JD will then spend considerable amount of time, usually three years, training the staff through each company position. After three years, each trainee will be assigned a managerial role. During the development process, Richard would personally guide these trainees during his spare time to invoke the teachings of JD and its philosophy.
How good are the company's cost analysis and accounting controls?
JD's cost analysis is so incredible; it can track how much tape each delivery personnel uses to package each good sold. Similar to Bezos, JD believes that the only way to offer consumers the lowest price is to eliminate all unnecessary expenses. This includes restricting company travel, and flying coach.
Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
I have done quite a bit of primary market research to verify the claim that JD is making. On 11/11 the equivalent of a black Friday in the U.S., I had 22 family members order items from JD and Alibaba. Each individual ordered over 30+ items on average, and all of the orders on JD were delivered on 11/11. As of 11/17, none of the products ordered through Alibaba have been delivered. The return policy on Alibaba also restricts users from using the product. If the buyer violates this, the return policy is canceled. None of this nonsense exist at JD.
I believe continuous monitoring of JD's user experience will tell us precisely who will win the e-commerce warfare. Taobao's edge is in its vast product offering. JD's edge is in its ability to never sell counterfeits while reliably deliver the products to your home.
Does the company have a short-range or long-range outlook in regards to profits and does this align with the compensation scheme?
JD's profit outlook is aligned for the long-haul as is Richard's incentive package, which is 10-years long.
In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?
Currently, all future capex is being funded by JD's cash flows. There are no indications of a potential dilution in the future.
Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
Yes. Recently, JD closed down its C2C (customer to customer) segment of the business, because it no longer believed that it could control the authenticity of its supplies. They did it with clarity.
When things are going well for JD, management continues to remain humble about the current competitive landscape in China. Richard remains humble that competitors could always easily overtake JD and encourages his team with the moto, "If we don't work hard today, we die tomorrow."
Does the company have a management of unquestionable integrity?
Given Richard's history, I believe he has unquestionable integrity.
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Disclosure: I am/we are long JD.
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.