Why This One Financial Metric Makes JD.Com Inc (ADR) Stock a Buy
The last time I wrote about JD.Com Inc (ADR) (NASDAQ:JD) was Oct. 19, 2017. Since then, the JD stock price has gone sideways, maybe even a little backwards. Interestingly, the company I compared it too — Alibaba Group Holding Ltd (NYSE:BABA) — has also flatlined over the past two months.
Source: Daniel Cukier via Flickr
So, I find myself wondering if the four reasons I gave for JD stock being a better bet than BABA still hold true. I know it’s only been a short time, but a lot can happen in the wild and woolly world of Chinese stocks.
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Here’s What’s Changed
The analysts now expect JD.com to generate $0.77 in fiscal 2019, seven cents less than three months ago, with an average 12-month price target of $50.04, which is 32% higher than its Dec. 8 closing price.
If I told you on Christmas Eve that your special gift for 2018 was a 32% return on JD.com stock, I think you’d be very happy despite the fact it would be a lower return than the 49% earned year to date.
The reality is that JD.com is moving from being a money-losing online retail operation to a moneymaker. Founder Richard Liu’s ambitions are so grand that he intends for the company to build 185 drone airports in rural southwest China over the next 36 months.
China’s Rural Poverty
Liu, who grew up poor in a rural Chinese village, wants to eliminate poverty in the country by lowering the cost of living outside the major cities.
“The villagers didn’t have much to eat, but our village head had pork all the year round,” said Liu speaking to students at his alma mater middle school in October. “That’s why I dreamed of becoming a village head when I was a child. I wondered, if I became one, whether I could enable all families in the village to have pork on their tables?”
Well, now that Liu’s a billionaire, he’s certainly capable of helping alleviate this problem.
However, to do that, JD stock has to keep moving higher. One way to ensure this happens is to keep an eye on this single financial metric.
Inventory Management
My colleague Josh Enomoto recently poured some cold water on the bullish case for JD stock, suggesting that the burgeoning middle class in China that every investor’s counting on to deliver big-time gains for consumer-based stocks isn’t nearly as a big a deal as one might think.
“McKinsey & Company, one of the leading authorities in Chinese demographic research, uses an astounding definition of ‘middle class.’” stated Enomoto on Dec. 5. “In China, making as low as $9,000 qualifies you into this relatively prestigious category. In the U.S., such an income (assuming full-time work) is illegal.”
He’s got a point.
Unless Liu can figure out how to lower prices for its goods in China relative to the standard of living in the U.S., eventually, the middle class in China, like the one in America, is going to run out of economic growth.
In the meantime, as Josh points out, JD.com is more like Amazon.com, Inc. (NASDAQ:AMZN) than Alibaba because it’s not just a middleman but actually owns the inventory it sells.
The One Financial Metric for JD Stock
So, JD.com’s net inventory as of the end of September 2017 was $5.5 billion, 61% higher than a year earlier. Meanwhile, its revenue in the same period grew by just 38%, suggesting there might be an inventory problem.
However, every company handles its inventory management differently. The trick is not having too much or too little on hand at any given time.
As JD.com continues to grow, it’s important that it never runs out of product to ship. That’s the cardinal sin for all retailers but especially those doing business online where fulfillment is everything.
At the end of the day, JD.com turns its inventory every 36.9 days or almost 10 times a year, which is slightly ahead of last year’s Q3 2016 pace of 37.3 days.
As long as this number remains in the range of 36-38 days, JD stock remains a solid buy in my opinion.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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