CEO Allegations To Rock Stock?

About: (JD)
by: Doug Young

Bottom line: The detention of's CEO on sexual misconduct allegations makes for good headline fodder, but is unlikely to have any extra impact on the company's stock that is already under pressure.

JD CEO questioned over sexual misconduct claims

The Chinese media have been buzzing all weekend over reports that e-commerce giant's (NASDAQ:JD) founder and CEO Richard Liu was detained by police in the U.S. over sex-based allegations. The story certainly does make for headlines, and will certainly come as a slight embarrassment to JD if and when the company and Liu ever fess up to anything inappropriate.

But from a business perspective, JD probably has bigger fish to fry than a small sex scandal involving Liu. The biggest issue for the company is sustained profitability, which has been elusive since its original Nasdaq IPO in 2014. Investor patience is clearly wearing thin towards the company, which has been running mostly on hopes and a few major positive strategic alliances to prop up its shares these last few years.

All that said, let's jump into the latest headlines that say Liu was detained on Friday and released a day later without having to pay any bail by police in Hennepin County in the U.S. state of Minnesota (English article). The police arrest record, which has gone viral on Chinese media, says a person with Liu's Chinese name, Liu Qiangdong, and birth date was detained on suspicion of unspecified sexual misconduct.

JD has put out its own statement, which is decidedly short on details. It says that Liu was questioned on an unspecified matter over some "false allegations," and was later allowed to continue on with his regular schedule after investigators found no improper behavior.

Muted Reaction

It's a holiday in the U.S. on Monday, so the markets should have plenty of time to digest this news before trading resumes on Tuesday. But my guess is that this will probably have little or no impact on JD's already beaten-down stock. The shares have moved steadily downward for most of the year, and are down 28 percent since Jan. 1 and down by an even steeper 38 percent since a peak in late January.

China tech watchers will know that JD isn't the only Chinese Internet company feeling some pain these days. Stalwart Tencent (OTCPK:TCEHY) (HKEx: 700) is down 21 percent year-to-date, including a recent slide over the last few days on some negative news about the local gaming industry. The other big giant, Alibaba (NYSE:BABA) is down by a relatively modest 5 percent, though even that looks weak when compared with the 16 percent gain for the Nasdaq so far this year.

From my perspective, JD's woes are directly linked to growing anxiety over if and when the company will ever make a profit. The company's net loss from continuing operations ballooned to 2.2 billion yuan ($322 million) in its latest reporting quarter, from 287 million yuan a year earlier.

Those kinds of wild swings have been quite typical in JD's short history as a publicly traded company, as it seems to use liberal accounting practices to occasionally post profitable quarters, only to swing back into the loss column almost immediately. Investors have limited patience when it comes to this kind of thing, and antics in Liu's personal life probably aren't helping matters. But as I've already said, I really doubt such antics will have any particular impact on the company's prospects or stock.

Disclosure: None.