Share prices of JD.com (JD -1.06%), China's leading direct retailer and second-largest Chinese e-commerce company after Alibaba, plunged 16% on March 10 following its fourth-quarter earnings report.
JD's revenue rose 23% year over year to 275.9 billion yuan ($43.3 billion), which matched analysts' expectations. Its adjusted net income grew 50% to 3.6 billion yuan ($569 million), or $0.35 per American depository share (ADS), which also topped analysts' estimates by eight cents.
But on a generally accepted accounting principles (GAAP) basis, JD reported a net loss of 5.2 billion yuan ($822 million), compared to a net profit of 24.3 billion yuan ($3.8 billion) a year ago. It also posted its first full-year GAAP net loss since 2018.
Image source: JD.com.
That sea of red ink, which JD attributed to its ongoing investments in its newer businesses, overshadowed its stable top-line growth. Should investors look past those near-term challenges and buy some shares of JD today?
JD Retail faces a gradual slowdown
JD Retail, the core business that generated the lion's share of the company's revenue in 2021, served 569.7 million annual active customers at the end of the year -- representing 21% growth from a year earlier. But over the past year, the segment's growth has gradually decelerated.
Growth (YOY) | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 |
|---|---|---|---|---|---|
Total revenue | 31.4% | 39% | 26.2% | 25.5% | 23% |
JD retail revenue | 27.9% | 35.3% | 22.7% | 23% | 21.3% |
Annual active customers | 30.3% | 29% | 27.4% | 25% | 20.7% |
YOY = Year-over-year. RMB terms. Data source: JD.com.
JD's slowdown isn't as severe as Alibaba's anemic 7% growth in Chinese commerce revenue in its latest quarter, but it faces the same headwinds. Just like Alibaba, JD mainly blamed its slowdown on macroeconomic conditions, weak consumer demand, and tough competition.
JD has also been expanding beyond its core first-party marketplace and relying more heavily on third-party merchants. That shift, which makes it more similar to Alibaba's Tmall, strengthens its margins but impacts its top line by only booking lower third-party fees instead of first-party revenue.
As a result, JD Retail's adjusted operating margin expanded 20 basis points year over year to 2.1% in the fourth quarter, and the segment's GAAP operating profit increased 35%.
JD Retail's margins improved even as it expanded JD Plus (its Prime-like subscription plan) with loss-leading perks like free shipping and discounts to lock in its shoppers. JD Plus ended the year with over 25 million subscribers, compared to about 15 million subscribers in mid-2020.
Stabilizing operating profits at JD Logistics
JD Logistics, which brought in 11% of JD's revenue in 2021, was once a deeply unprofitable network of first-party warehouses and fulfillment centers.
But after years of investments, economies of scale finally kicked in and the segment's losses started to narrow. JD then opened up that nationwide network to external customers, which brought in higher-margin revenue, and it raised fresh cash for the segment in a well-received IPO last year.
JD Logistics posted GAAP operating losses in the first nine months of 2021, but its operating margin turned positive again in the fourth quarter.
But the New Businesses are drowning in red ink
JD Retail and JD Logistics are generating sustainable growth, but the New Businesses segment -- which includes JD Property (its infrastructure asset and property management division), Jingxi (its discount marketplace that targets lower-tier cities), overseas businesses, and other initiatives -- is still drowning in red ink.
JD generated less than 3% of its revenue from the New Businesses segment in 2021, but the segment's GAAP operating loss more than doubled to 10.6 billion yuan ($1.7 billion) for the full year -- which reduced JD's operating profits by a whopping 66% to 4.14 billion yuan ($650 million).
All that spending, especially on Jingxi, suggests that JD is getting worried about Pinduoduo, which gradually evolved into a fierce competitor in China's lower-tier cities over the past few years. It also suggests it's desperately seeking out new sources of growth as JD Retail matures.
Excluding the New Businesses, JD's full-year operating profit would have risen 14% to 21.7 billion yuan ($3.4 billion). It's a bit frustrating to see JD book such a massive loss on a segment that contributed less than a percentage point to its annual sales growth.
Is JD's stock too cheap to ignore?
In 2022, analysts expect JD's revenue to rise 22% as it turns profitable again. In 2023, they expect its revenue to grow another 17% as its net income doubles. We should take those estimates with a grain of salt, but they suggest that JD's spending spree will be transitory.
JD's stock initially looks cheap at 0.4 times this year's sales, but lower-margin direct retailers are more accurately valued by their earnings. JD currently trades at 45 times forward earnings, which doesn't seem particularly cheap for a retailer that just posted its first annual net loss in three years.
Like other Chinese tech stocks, JD's valuations have also been depressed by unpredictable regulatory headwinds in China and delisting threats in the U.S. All those challenges make JD a tough stock to recommend in this challenging market for growth stocks and e-commerce companies.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns and recommends JD.com. The Motley Fool has a disclosure policy.
