- JD stock is dropping after the company missed fourth quarter earnings estimates.
- Revenue growth remains robust.
- Near-term margin headwinds are all growth investment related.
- This weakness is an opportunity for long-term oriented shareholders.
JD.Com (NASDAQ:JD) is dropping big after the Chinese e-commerce giant reported fourth quarter earnings that slightly missed expectations. We believe the sell-off is a buying opportunity. When it comes to a company like JD that is growing revenues at a 30-40% clip, we believe sustained high revenue growth is more important in the near-term than margin expansion. Consequently, a slight earnings miss on still-robust revenue growth doesn't mean much to us. Regardless of near-term margin trends, we think this is still a secular growth stock with promising upside potential in a long-term window as global expansion efforts play out.
As China's second largest digital commerce player, JD has been a pure-play on the booming China consumerism narrative. This narrative is quite simple. There are a ton of people in China, and a majority of those people are starting to urbanize, earn more, and spend more. Naturally, this leads to an explosion in Chinese retail, and specifically, to an explosion in Chinese digital retail. This is where JD operates and dominates, and therefore, the company has morphed into a winning investment for the past several years as China's consumer class has boomed.
But the exciting thing about JD is that the company is becoming much-more than just a pure-play on China's booming middle class. The company is aggressively pushing into international e-retail markets, specifically Europe, in hopes of connecting China's burgeoning consumer class with goods and products from across the world, and vice versa. By 2019, JD expects to sell roughly $2.4 billion worth of French merchandise alone. That is a sizable revenue bump from just one country. If JD can replicate that success at large across Europe, you could easily be talking about another $10-20 billion (France is only 15% of EU GDP).
Beyond global expansion, JD is also making a huge offline retail push, which includes opening 1,000 fresh-food stores over the next 3-5 years. The company is also investing big in its already massive logistics network, raising $2.5 billion last month and pumping money into things like robotics and automation.
These aren't small moves, and while they have potentially robust long-term growth implications (China's grocery market is the largest in the world, so China grocery presents a massive opportunity for JD), they also require big investment, and big investment leads to lower margins. That is what happened this quarter, as JD's expense growth swelled and its profit growth lagged.
But revenue growth remained robust, and the revenue guide was strong. That means that all those big investments are paying off both in terms of magnitude and longevity of growth. Into the foreseeable future, this is still a 30% to 40% revenue growth narrative. Margins are just low for the time being because of growth-related investments. Eventually, those growth-related investments get phased out. At that point, profits soar thanks to rising margins on a huge revenue base.
Moreover, this single quarter set back in margins is taken out of context. While gross profit growth did lag revenue growth this quarter, that hasn't been the case for some time. For the past several quarters, gross profit growth has healthily outpaced revenue growth. Indeed, margins have been on a solid uptrend ever since early 2016. As such, concerns about a one quarter setback in margins seem overdone considering this is not a secular problem, but rather a near-term one.
All in all, then, this quarter is nothing more than a road bump in the secular growth narrative at JD. This is a company that is dominating the Chinese digital commerce scene, and is prepping for huge moves into Europe and offline retail. Margins are currently low as a result of this expansion, and will remain low into the foreseeable future so long as the company continues to try to attack giant new markets. But each giant new market attacked means more revenue, implying that when JD wants to turn the profitability knob, dial back growth spend, and kick up margins, those margins will climb higher on a huge revenue base. That is how you get Amazon (AMZN) and Netflix (NFLX) like profit growth. It is no coincidence that JD's long-term earnings growth estimates are in-line with those from Amazon and Netflix.
In totality, patience will be rewarded. JD stock is a name to own for the long term. Global expansion efforts will drive revenues, profits, and the stock markedly higher. Until the revenue growth narrative materially weakness, this is a "buy the dip" stock.
This article was written by
Analyst’s Disclosure: I am/we are long JD, AMZN, NFLX. 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.
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