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JD Stock Investors Undeterred by Delisting Fears

5 years 4 months ago

Chinese stocks are out of favor right now. Investors in JD.com (JD), a Chinese online retail company, certainly know the feeling of buying into what feels like a "wall of selling" on a daily basis.

There are well-founded reasons for worry about Chinese stocks. Among the biggest risk to owning U.S.-listed Chinese stocks like JD is the threat of delisting, which has been brought about by the Biden Administration.

President Biden recently signed into law a Trump-era piece of legislation that requires Chinese firms to open their books to U.S. regulators. Citing national security law, China has refused to let U.S. regulators inspect the books of Chinese companies.

This has led to an immense amount of speculation that giants like JD could potentially be delisted from U.S. exchanges. Investors have increasingly priced this risk into even the best Chinese stocks. In many cases, large institutional investors don’t like the risk-reward profile of stocks like JD in this environment.

Given the shaky status of U.S.-China relations, it’s understandable that there will be political posturing for some time. However, the fact that Biden hasn’t backtracked this piece of Trump-era legislation is telling: the U.S. government seems to have little appetite for appeasing the Chinese.

In this light, it can be hard to understand why JD is a good investment right now. Indeed, the potential delisting poses a massive risk, and it’s enough to keep some investors up at night. (See JD.com stock analysis on TipRanks)

On the other hand, many investors may be correct in taking a bullish stance on JD right now.

Post-Pandemic Environment Should Be Welcomed By Investors

Aside from the aforementioned political risks, investors are concerned about the potential for slowing e-commerce growth in the post-pandemic world. In North America and Europe, such a view makes sense. People have been rushing to the malls like never before. At least, that’s what the stock prices of retail stocks look like right now.

However, in China, it’s a bit of a different game. The Chinese have aggressively adopted e-commerce platforms to an extent that American and European residents have not. Before the pandemic, China already accounted for 45% of global e-commerce sales. If anything, the pandemic only accelerated a trend that was on hyper-drive.

This phenomenon results from a variety of factors, but leads investors to an interesting line of thinking: perhaps e-commerce growth won’t slow as a result of the reopening. Instead, perhaps growth could actually accelerate as the economy heats up.

JD’s position as a fast-growth company shouldn’t be discounted. It’s a company competing with larger behemoths like Alibaba (BABA), but it is still gaining market share in a sector that’s absolutely exploding with growth right now.

In other words, JD is a faster-growing e-commerce play than most American companies, in a country with a growth rate well in excess of the U.S. It’s like Amazon (AMZN) on steroids (or Amazon Jr. if you think Alibaba is Amazon).

What Analysts Are Saying About JD Stock

According to TipRanks’ analyst rating consensus, JD stock comes in as a Strong Buy. Out of 17 analyst ratings, there are 15 Buy recommendations and 2 Hold recommendations.

As for price targets, the JD average analyst price target is $102.24. Analyst price targets range from a low of $80.00 per share to a high of $119.00 per share.

Bottom Line

JD’s growth rate shows just how cheaply valued this stock is relative to other high-growth plays. A 30% CAGR is certainly nothing to sneeze at.

However, the fact JD trades at roughly 20-times forward cash flows deserves consideration. Investors simply can’t find this kind of growth anywhere at this valuation. It’s among the highest-quality growth stocks in the market trading at this kind of a discount.

Risks certainly do exist in owning JD, especially relative to its American or European peers. However, there’s reason to believe this risks are more than priced in right now. At the valuation JD trades at, this stock provides investors with about as wide a margin of safety as one could ever hope for.

This is a stock investors could get excited about.

Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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