JD.com Share Price Has Crashed 60% – Good Opportunity?

We know in times like these, it is quite natural for most investors to shift their focus away from the operating businesses, to narratives of ‘doom and gloom’. Turning off the noise for a moment, and a closer look at what has actually been going on inside JD.com, can however put things in perspective … a perspective that could potentially be very rewarding for long term focused investors. We would like to remind our readers that usually ‘popular narratives’ are not the best source of long term wealth.

Now, let’s look at JD.com’s 2021 results. JD.com ended 2021 with solid results, growing its active customers by 21% (to 570 million), and its revenue by 28% (to RMB 952 billion), faster than Alibaba’s 22% (in the last 9 months of 2021). Service revenue, which has a high gross profit margin, grew faster at 45% to RMB 136 million, reaching 14% of total revenue.

On profitability, the profitability for the overall business actually decreased, with the fulfilled gross profit margin decreasing from 8.1% of revenue in 2020 to 7.4% in 2021, and the operating profit margin (excluding gains on properties sales) decreasing from 1.4% to 0.4% (resulting in operating profit of RMB 3.4 billion). This decrease in overall profitability is mainly due to heavy investments in JD Logistics and the new businesses, with operating losses of RMB 1.8 billion and RMB 11.4 billion respectively, and a 120% increase in share based compensation expense to RMB 9.1 billion.

However, if we look at the core JD Retail business, its operating profit margin (before unallocated items) continued to improve, to 3.1% in 2021 (from 3.0% in 2020 and 2.5% in 2019, or 0.9% five years ago in 2016), as it continues to gain scale advantage.

As we have previously mentioned in our in-depth research of JD.com, one of JD’s stronger and more sustainable moats is its cost advantage due to scale, where it has a lower cost base due to stronger procurement power for its 1P business (particularly in the more mature product categories like electronic and home appliance), and where it benefits from scale advantage for its logistics business. This allows JD.com to charge lower prices (to provide more value to consumers), but still generate good and increasing profitability, giving it even more scale advantage to charge even lower prices if needed to fend off competition and earn strong returns on capital.

The chart below shows that JD.com has been progressing well in widening this cost advantage moat in the past 7 years. Since 2015, the profitability for the overall business has been improving gradually, in terms of gross profit margin, fulfilled gross profit margin, and operating profit margin. These overall margins dropped in 2021, but for good reasons, as JD reinvested a lot in building up its relatively newer business with lower scale now, like JingXi to tackle the lower tier markets, and the more recent product categories (like fresh produce or supermarket products, healthcare, cosmetics and baby products), and in building up more logistics infrastructure under JD Logistics. For example, for the supermarket category, in 2021, JD made a lot of innovations including on its warehouse stores, and its profitability for that category continued to improve and is close to the breakeven point now.

Although these investments would pose as some headwind to JD’s overall profitability in the near term, they could help JD to scale much bigger and achieve dominance and cost advantage in more product categories and markets in the long term, helping it to widen its moat to grow even stronger in the future, if executed well. 

Meanwhile, its stronger core business has been holding up well on profitability, with the operating profit margin of JD Retail increasing every year to the 3.1% now (for 2021), and with the management remaining confident to hit its longer term target of mid to high single digit margin for that business.

In particular, the CFO, Sandy Xu, said “Our core business is well on track to realize sustainable margin improvement while optimizing for a healthy category mix and exploring new business strategies to expand our time in the long run”, and “Looking ahead to 2022, while we remain mindful about the near-term macro volatility, we aim to continue to gain market share with a set of proactive sustainable and high-quality growth strategies and at the same time, remain on track of our long-term margin improvement trajectory”.

However, the market does not seem to recognise, or place enough value on, this potential widening moat, with JD’s share price crashing by ~16% after its earnings release on 10 March 2022, or by ~60% since its peak (of ~USD 106) in February 2021, with its market capitalisation standing at ~USD 76 billion in mid March 2022.

This share price crash could be related to concerns over JD’s business performance… 

For the remaining points of this article, check them out at our Multibagger Research Series at https://learn.moneywisesmart.com/courses/multibagger-research-series/lectures/38837970

For our summary analysis of the company, check out the video below.

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