Lost in the market's pre-holiday sea of red was a 5% pop in the price of struggling Chinese e-commerce giant JD (NASDAQ: JD ) after reports that founder and CEO Liu Qiangdong won't face rape charges in Minnesota. The allegations were just one of a myriad of issues hanging over JD stock, issues that have driven JD stock down 54.4% this year versus the 10.8% drop in the Nasdaq Composite index
To be sure, many of the issues which have plagued JD stock, much like the CEO rape allegations, are not about the company's fundamentals. That means that JD shares won't stay down forever. Instead, near-term pain should eventually turn into long-term gain.
But, those issues don't get fixed because the CEO has cleared his name. Yes, it's a step in the right direction. But, it's not a panacea. As such, don't expect much improvement any time soon.
Challenged By a Range of Issues
The issues which have plagued JD stock in 2018 didn't start with Liu rape allegations, nor do they end there. Instead, this company has faced a myriad of issues all year long.
First and foremost, the Chinese economy is slowing. There were some cracks starting to show in early 2018. Throughout the year, those cracks became more noticeable, and today, the China economy is significantly slower than it was at the beginning of the year.
This huge slowdown is at the heart of JD's struggles. From 2015 through 2017, JD was a 40%-plus revenue growth e-commerce company with expanding margins, and those favorable characteristics drew comparisons to Amazon (NASDAQ: AMZN ). But, those comps faltered this year. As the China economy slowed, so did JD's growth rates. Revenue growth started the year off weak at just 33% in the first quarter. Things only got weaker as the year progressed. Last quarter, revenue growth was 25%. Next quarter, it's expected to be 20%.
Meanwhile, JD's margin expansion narrative that everyone thought was going to continue for the next several years, has all of a sudden disappeared. Management has been making big investments in 2018 in new growth initiatives like logistics, cloud, and international expansion. While these investments position the company for long-term success, they also eat into margins today, to the point where JD's margins have actually dropped substantially in 2018.
Overall, JD stock has been hammered by much more than the CEO rape allegations. While the Minnesota rape investigation's fade into the rear-view mirror is a positive, it's no panacea for what ails the stock. Things need to improve on the operational front before the JD share price sees a meaningful rebound.
Issues Are Fixable
To be sure, the operational issues plaguing JD stock are fixable.
Revenue growth? It's stalling out because of a slowdown in China's economy and perhaps some domestic e-commerce market saturation. Even if these headwinds persists, revenue growth should have some tailwinds kick up soon to push growth higher. Namely, JD is expanding internationally, specifically, into the U.S. and Europe, two markets that could be huge opportunities for the Chinese e-commerce player. True, those markets are already loaded with e-commerce players, but JD's China credentials presents a unique advantage that could resonate well with western consumers.
Also, revenue growth should get a boost from expansion into secular growth markets like cloud. That new cloud growth combined with e-retail expansion, should help revenue growth pick up in 2019, and perhaps accelerate back to 30%-plus rates in the future.
Margin expansion? That, too, should re-enter the fold. JD has made very clear that this was going to be an investment year with depressed margins. We've seen this rodeo before, with Amazon, Netflix (NASDAQ: NFLX ), and other hyper-growth giants. Invest big today. Take a hit on margins. Grow the business. Scale back investments. Margins track higher.
The same should play out with JD. As this company expands its global footprint and develops a sizable cloud presence, expansion-related investments should peel back. As they do, margins will trend higher, and they will do so on a substantially larger revenue base, meaning huge profit growth potential.
None of this is priced into JD stock yet, meaning the shares could rally in a big way once its other issues get fixed.
Bottom Line on JD Stock
The Wall Street Journal last week described the decision not to bring charges against Lio brought to a close a turbulent period for the founder of the e-commerce site since he was accused of rape in late August. For investors, this is a a step in the right direction but it's not the catalyst that gets JD stock back on a long-term uptrend.
Instead, that boost will be improving operational fundamentals. Revenue growth trends need to turn around, and margins need to stabilize. Those two things will happen, just not now. As such, JD stock likely won't bounce back any time soon.
As of this writing, Luke Lango was long AMZN and NFLX.
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