Chinese e-commerce giant JD.Com Inc(ADR) (NASDAQ: JD ) has fallen on tough times recently. Ever since the company's last earnings report in early March, JD stock has fallen 20% to essentially 52-week lows of right around $37.
Source: Daniel Cukier via Flickr
Is this a major turning point in a stock which has rallied hard off a $20 bottom since mid-2016? Or is this just a natural road-bump in a still strong growth stock?
I think the latter. JD.Com stock is a long-term winner due to its dominant positioning in China's big-growth e-commerce market. Plus, the company is actually expanding its reach to include multiple tangential high-growth markets, thus extending and strengthening its big-growth runway.
For these reasons, near-term weakness in JD stock is nothing more than a long-term buying opportunity.
Here's a deeper look:
Why JD.Com Stock Has Dropped
On last quarter's earnings call, management gave a pretty dire warning about near-term margins.
In broad strokes, the company is investing big-time into new growth markets, such as logistics, international commerce, cloud and AI. Those big investments mean that margins will be pressured in the near term. As such, net profit margins are expected to be just 1.5% this year.
That isn't great news for investors. Revenue growth has never been a problem for this secular growth company. Instead, the question mark has always revolved around profitability.
Profitability has steadily improved over the past few years, but this year's 1.5% margin guide calls for very little improvement. As such, analysts have reset their near-term earnings growth prospects for the company. Earnings estimate for this quarter, next quarter, this year and next year have all dropped significantly over the past 90 days.
As those estimates have come down, so has JD stock. Indeed, this year's earnings estimates have come down by over 10% over the past 90 days. During that same time frame, JD stock has dropped 12%.
Why It Doesn't Matter Long Term for JD.com
In the bigger picture, these near-term margin concerns are rather irrelevant.
Yes, margins will be depressed near-term due to big investments. But those investments are going towards big growth markets and will eventually yield materially positive returns.
Namely, JD is aggressively expanding internationally. The company isn't satisfied with dominating the China e-commerce market - they want a piece of the global e-commerce pie, too.
That is very smart move. Not only does it expand JD's addressable market, but it also lengthens the growth runway. Eventually, the China e-commerce market won't be a hyper-growth market anymore. At that time, JD will be able to pull international levers to keep growth strong.
Moreover, JD is jumping head-first into logistics, AI and cloud. All three of these are massive markets with huge growth prospects. JD has the resources to become a big player in each of these markets and is investing big at an early stage so as to guarantee themselves a seat at the table. Consequently, it is actually fairly likely that JD emerges into a leading player in logistics, AI and cloud over the next several years.
The net result of recent big investments, then, is huge revenue growth over the next several years. Eventually, these new businesses will scale, and the company's overall margin profile will improve dramatically.
From this perspective, near-term margin volatility really isn't that big of a deal, especially considering margins in the core commerce business continue to expand at a robust rate.
Bottom Line on JD Stock
JD.Com stock is dying right now because of near-term margin concerns, but those concerns are rather meaningless in the bigger picture.
Consequently, further weakness in JD stock should be viewed as a long-term buying opportunity.
As of this writing, Luke Lango was long JD.
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