By Daniel Shvartsman
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It's easy to take shortcuts in investing and to make conclusions based on patterns, trends, or what the consensus is or isn't. It's something we talk about on Behind the Idea a lot, and something we do from time to time too.
In his work on JD.com (JD), Lester Goh has gone well beyond the headlines and basic analysis. I had first noticed his work via his twitter feed and then his blog (though not, alas, his dormant Seeking Alpha profile). I was impressed by the degree of detail. For example, when Richard Liu faced rape accusations last year, Goh spent his time tracking WeChat indexes to see whether consumer sentiment or search behavior was changing in light of the charges (they were not).
We spoke last Friday about JD and the investment story. I wanted to ask about the headlines, sure, but also about the valuation techniques we had discussed last time out, the underlying questions about China, and whether this was a crowded trade. Goh answered these questions and also outlined the key advantages in his view of JD's position, and why investing in Chinese companies really isn't that different than anywhere else. Click play above to listen.
- 3:00 – Summing up the JD bull case: low-cost operator, runway for reinvestment, and compelling valuation*
- 11:30 - Assessing e-commerce vs. physical retail
- 16:15 - How is valuation affected by investment in entities not related to JD's core business?
- 22:15 - Time frame for normalization of JD's EBIT and free cash flow
- Thunder round on JD
- 29:15 – Whether JD is a "crowded" trade and whether that matters
- 32:30 - Threat of China/US trade war on stock – auditor oversight as a secret effect
- 35:30 - How important is US listing to JD's business?
- 37:30 – JD vs. Alibaba
- 51:30 – How big an effect did the Richard Liu accusations have on JD, and the risk of investing based on management
- 1:02:30 – China concerns valid or?
- 1:10:00 – Taking a fresh look at JD, and the distinction between being right and making money
*Lester asked to add this note about the margin outlook for JD:
I think 4% operating margins for the direct sales business is reasonable. Deloitte does a global survey of top 250 retailers every year and 4% is in-line with the average of these retailers. Walmart (NYSE:WMT) earns 5.6% operating margins on its US business while Target (NYSE:TGT) is at 6%+. In addition, prior to being disrupted by e-commerce, Suning, Gome, and Sun Art earned 4%-7% operating margins. Therefore I believe 4% operating margins for the direct sales business is conservative.
As for the marketplace business, 30% operating margin is in-line with what most digital advertising businesses earn and is also substantially below the 50%+ BABA earns on its core commerce segment. Therefore I believe 30% operating margins for the marketplace business is conservative.
As always, feedback is welcome at email@example.com. We'll have a transcript of today's episode posted within a week, and are doing another podcast with a (at least previously) bearish author about JD, so stay tuned.
Lester said he was more concerned with making money than being right, and asked smart listeners to point out any mistakes. So, what do you have? Thoughts on the JD.com reinvestment runway or JD's advantage compared to Alibaba (BABA)? Chime in below.
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.
Additional disclosure: Daniel Shvartsman (the host) has no positions in any stocks mentioned. Lester Goh (the guest) is long JD. Nothing on this podcast should be taken as investment advice.