Why JD.com Sank Today
What happened
Shares of Chinese e-commerce leader JD.com (NASDAQ: JD) sank today, falling 8.3% as of 1:28 p.m. ET.
JD.com has been battered this year amid a sluggish recovery in the Chinese economy after COVID-19 lockdowns were lifted last year, in addition to heightened geopolitical challenges.
Today, the company received yet another negative news item, as a Wall Street bank lowered its price target on shares, along with the company's revenue-growth outlook. However, that same analyst also has a price target well above where shares trade today even after the downgrade.
So what are investors to do?
So what
Today, analysts at Jefferies lowered their price target on JD.com from $97 to $80. That's a significant cut percentage-wise and likely led to the sour mood.
Of course, JD.com's share price is now down below $28 per share. Needless to say, it's a bit strange to see the stock move down so much even when the catalyst for the move is a price target nearly triple the current price!
Still, the Jefferies' analysts commentary may have harmed sentiment for the stock, as it did have to do with fundamentals. The analysts now think JD.com's core retail business will only see flattish year-over-year revenue growth in the recently completed quarter.
The retail division only grew 5% year over year last quarter, so it's not a stretch to think growth could go flat in the recently completed quarter. Of note, JD.com is seeing higher growth from its smaller segments in logistics and on-demand retail. Overall revenues in the June quarter, when factoring in new businesses, were up 8%.
Clearly, the difference between the analysts' price target and today's market price has to do with the multiple investors are willing to pay.
On the surface, JD looks quite cheap, now trading at less than 15 times trailing earnings! That's usually a multiple reserved for a low-growth, mature company and not an innovative company in a growing economy.
Of course, China is not regarded as the rising economy it was a few years ago. China's growth has stagnated following its harsh Covid-19 lockdowns, a real estate crisis, rising debt, and rising tensions with the U.S. Given recent geopolitical turmoil, some rightly fear investing in U.S.-listed Chinese stocks at all, given the risks of an eventual conflict. And of course, JD also faces some intense competition within China from strong rival e-commerce platforms Alibaba and Pinduoduo.
Now what
Bargain hunters may see a lot of value in JD.com shares, and there certainly could be upside if the Chinese economy eventually recovers. But it would probably also take a thawing of U.S. and China relations to really give JD.com and other Chinese stocks a significant boost.
It's a bit hard to see that happening in the near term, so JD.com and rivals may be stuck at cheap valuations for the foreseeable future.
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Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends JD.com and Jefferies Financial Group. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
