Shares of Chinese e-commerce giant JD (NYSE:) have been in bounceback mode in early 2019 for one very simple reason: the narrative surrounding JD stock has changed dramatically — for the better — over the past several months.
Specifically, over the past several years, the narrative surrounding JD stock has been one defined by rapidly decelerating revenue growth and profit-margin erosion, which led to concerns surrounding the company’s long-term profit growth potential. As those concerns grew, JD stock dropped. From $50 in early 2018, to $20 by late 2018.
But that slowing growth, compressing-margin narrative has changed course over the past several months. JD’s revenue growth rates have started to stabilize in the 20% range. Profit margins have begun to expand meaningfully. Management expects both of those trends to persist for the foreseeable future. Thus, clarity and optimism have been injected into this company’s long-term profit outlook. That dynamic has ultimately propelled JD stock 30% higher in 2019.
JD stock will stay in rally mode for the foreseeable future. This new narrative implies that JD has big long-term profit growth potential. That big long-term profit growth potential still isn’t fully priced into shares. Hence, JD stock has runway to head even higher over the next several months.
How much higher? The fundamentals say JD stock has runway to levels north of $30. Consequently, I’m staying bullish on this stock until it crosses above $30.
The Narrative Has Changed for the Better
When it comes to JD, the big-picture narrative is pretty straightforward.
You basically have the Chinese version of Amazon (NASDAQ:), which operates a giant e-commerce business in China’s rapidly expanding and urbanizing consumer economy. Much like Amazon, JD operates that e-commerce business at slim profit margins, but the long-term plan is to win market share and then leverage scale to meaningfully expand profit margins. Also, much like Amazon, JD has jumped into multiple tangential growth verticals — like logistics — and while those businesses operate at poor margins today, they too will eventually scale into much more profitable operations.
Because the long-term plan follows the Amazon roadmap and does pave the path for huge profit growth at scale, JD stock soared in early 2018 to $50.
But that long-term plan was called into question throughout 2018, as the company’s growth rates decelerated and margins failed to expand with scale. Specifically, from the end of 2017 to the end of 2018, revenue growth dropped from ~40% to ~20%. Meanwhile, operating margins were sliced in half from 0.8% to 0.4%. As investors questioned the long-term profit trajectory, they sold the stock, and shares of JD fell all the way to $20.
In early 2019, though, the narrative has changed course. It once again supports huge profit growth at scale. Revenue growth has stabilized over the past two quarters around 20%, and projects to stay at 20% next quarter too. Meanwhile, operating margins expanded 70 basis points in the fourth quarter of 2018, and 80 basis points in the first quarter of 2019.
Thus, the Amazon roadmap of sustained big revenue growth on top of margin expansion is once again the underlying trend at JD. This underlying trend ultimately supports JD stock shooting above $30 soon.
JD Stock Has Good Upside Potential
The numbers supporting JD stock look pretty good at the moment.
You have a 20%-plus revenue growth company with growth that projects to stabilize around the 20% mark for the foreseeable future. At the same time, you have operating margins that are hugely depressed, hugging the flatline, making huge upward progress in early 2019, and which project to keep heading higher over the next several years. Thus, for the foreseeable future, JD projects as a big revenue-grower on top of big margin expansion, which should drive doubly big profit growth.
That’s why analysts see EPS essentially this year, rising by 50% next year, and rising another 35% the following year. Net net, analysts think this is a 45% annualized profit-grower over the next several years. JD stock trades at less than 40 times forward earnings.
A 40 forward multiple for 45% profit growth is an attractive combo. If you model that out, EPS should get to around $2.20 by fiscal 2023, from $0.34 in fiscal 2018. High quality retailers, like Walmart (NYSE:), tend to trade around 20 times forward earnings. Based on that 20 multiple, a reasonable fiscal 2022 price target for JD stock is $44. Discounted back by 10% per year, that equates to a fiscal 2019 price target of roughly $33.
Thus, this rally in JD stock has fundamentally supported runway to above $30 in 2019.
Bottom Line on JD Stock
The narrative surrounding JD stock has completely changed over the past two quarters. This new narrative — defined by stable revenue growth and big margin expansion — once again supports robust profit growth at scale.
This robust profit growth is not fully priced into JD stock, yet, and the stock has fundamentally supported runway to levels above $30 in 2019.
As of this writing, Luke Lango was long JD, AMZN, and WMT.
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