JD.com, Inc. (JD) is one of China's two largest B2C online retailers by trading volume and revenue. The Beijing-based company was ranked #59 on the Fortune Global 500 list that was released on August 2, 2021, up 43 places compared with last year. In addition, the stock has gained 5.6% in price over the past month to close yesterday’s trading session at $87.71. Also, several analysts have raised their price targets on JD after its better-than-expected third-quarter results on November 18.

JD’s shares may have also gained because the company did not provide guidance in its latest earnings report, while its competitor, Alibaba Group Holding Limited (BABA), provided weaker-than-expected guidance for its fiscal 2022.

This month, JD was fined by China’s State Administration for Market Regulation for “failing to declare illegal implementation of operating concentration.” Also, JD warned that slowing consumption amid higher input costs could hurt business in the second half of its fiscal year. So, its near-term prospects look bleak.

Click here to check out our E-commerce Industry Report for 2021

Here is what could influence JD’s performance in the near term:

Regional Challenges

According to a Reuters report, China's economy hit its slowest pace of growth in a year in the third quarter, hurt by power shortages, supply chain bottlenecks, and major wobbles in the property market, such as the China Evergrande Group debt crisis. The world’s second-largest economy’s GDP grew 4.9% year-over-year for the July-September quarter, its weakest growth rate since the third quarter of 2020. The country has been struggling to contain recent outbreaks of COVID-19 cases. In addition, China’s ongoing tech crackdown will likely continue impacting JD’s business.

Mixed Financials

JD’s total revenues increased 25.5% year-over-year to $33.94 billion for the third quarter, ended September 30, 2021, topping analysts’ expectations. A ‘growing consumer mindshare’ is expected to have helped boost its revenue growth. However, its non-GAAP net income decreased 9.2% year-over-year to $783.44 million, while its non-GAAP income per ADS came in at $0.49, down 7.6% year-over-year. Furthermore, its FCF declined 44.7% year-over-year to $645.07 million.

Low Profitability

In terms of trailing-12-month gross profit margin, JD’s 7.29% is 79.7% lower than the 35.89% industry average. Likewise, the stock’s 14.17%, 0.82%, and 5.37% respective trailing-12-month ROCE, ROTC, and ROTA are lower than the 17.70%, 7.82%, and 6.22% industry averages. Its 2.88% trailing-12-month net income margin is also 56.4% lower than the 6.61%.

Stretched Valuation

In terms of forward non-GAAP P/E, JD’s 56.84x is 259.7% higher than the 15.80x industry average. The stock’s forward 181.26x EV/EBIT is 1,182.3% higher than the 14.14x industry average. In addition, its forward EV/EBITDA and P/B of 48.66x and 4.39x, respectively, are higher than the 10.47x and 3.66x industry averages.

POWR Ratings Reflect Bleak Prospects

JD has an overall D rating, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. JD has a C grade for Stability, which is consistent with its 1.06 beta.

The stock has a D grade for Growth, which is in sync with analysts’ expectation that its EPS will decline 39.1% in the current quarter (ending December 31, 2021) and 18.3% in fiscal 2021.

JD has a D grade for Quality, in sync with its lower-than-industry profitability ratios.

JD is ranked #42 of 55 stocks in the F-rated China group. Beyond what I have stated above, we have also rated the stock for Value, Sentiment, and Momentum. Get all the JD ratings here.

Bottom Line

Even though China’s regulatory crackdowns may have had less impact on JD compared to some of its peers, regulatory authorities have imposed a fine on it. And its growth prospects seem uncertain amid slowing consumption. Moreover, considering the company’s weak profitability and growth estimates, we think the stock is best avoided now.

How Does JD.com (JD) Stack Up Against its Peers?

While JD has an overall POWR Rating of D, one could check out these A (Strong Buy) or B-rated (Buy) stocks in the China group, such as Fuwei Films (Holdings) Co., Ltd. (FFHL), FinVolution Group (FINV), and Weibo Corporation (WB).

Click here to check out our E-commerce Industry Report for 2021

JD shares rose $2.51 (+2.86%) in premarket trading Tuesday. Year-to-date, JD has declined -0.22%, versus a 26.28% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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