Tomorrow, JD.com (JD), in a much anticipated IPO, will debut on the NASDAQ. JD.com is a Chinese, direct sale online retailer. They have never made a profit and are currently operating on razor thin margins, so the expected valuation of over $20 Billion would normally act as a giant red flag for me. I felt this way when Twitter (TWTR) debuted last year, for example, but this case is different. Whereas TWTR struck me as a stock that could make short term gains based on familiarity and hype, there were too many questions to make it a decent long term investment in my eyes. JD, on the other hand, has several advantages.
Back in November, at the time of that high profile IPO, my objections to Twitter were not just that they had not turned the corner to profitability. There was also the fact that they were in a business, social media, which was essentially trendy and depended on the whims of a fickle group of young consumers. Add to that that they were still working out how to monetize their popularity and the hype surrounding the launch seemed to be just that.
At the time, however, it seemed that nobody cared about any of that. Popularity, not profit, was the buzzword. In the last couple of months, however, sentiment has changed. Growth and momentum have been punished and cold hard cash has been more valued. A glance at the chart for TWTR since the IPO confirms that.
In that environment, and with increasing questions about the sustainability of rapid Chinese growth, it would seem on the surface that JD.com’s IPO is best left alone. Dig a little deeper though, and there are reasons to believe that those lucky enough to have received an allocation and those who buy in the first few days of trading could have themselves a good long term investment.
At the time of their debut, Twitter, as I said, was not only unprofitable, but also struggling to monetize their popularity at all. They launched with a similar valuation to that expected for JD, but with revenues of around $253 Million. JD.com, on the other hand, has fast growing revenues of around $11 Billion. Of course, the businesses are different, but it is easy to over think this, and it strikes me as far easier to turn a good profit on $11 Billion than on $253 Million. Right now, 95% of JD’s costs go to revenue acquisition, which tells us that the lack of profit is more about aggressive growth than inefficiency.
As for growth potential, the Chinese e-commerce market shows little sign of slowing, particularly in the mobile space. JD.com’s partnership with Tencent (TCEHY), a social media and online gaming giant, would suggest that they will be well placed to expand, both in terms of market share (currently around 7-8% and dwarfed by Alibaba) and product offerings. Rapid growth is possible, and from a huge revenue base.
The generally negative market sentiment surrounding growth expectations in general and Chinese growth in particular just re-enforces my positive feelings about the stock. It makes it less likely that we will see the kind of hysteria that resulted in TWTR trading at a 92% premium to the IPO price on its first day. If that does happen, then of course caution would be advised, but it looks unlikely. If there is some negativity, though, or JD trades tomorrow at an acceptable premium, it will be a time to remind ourselves of the words of The Sage of Omaha and “Be greedy when others are fearful.”
Many are comparing JD.com to Amazon (AMZN) and there are remarkable similarities. Both are large internet retail companies that sell direct to the consumer and neither is afraid to re-invest everything in the hunt for growth. One should bear in mind, however, that, given the rapid expansion still taking place in Chinese internet use, JD.com is closer to the AMZN of 10 years ago than the AMZN of today, and investors at that time did Okay, to say the least. The end result for buyers of JD may not be quite as spectacular, but there is every indication that the stock will be a good long term investment.