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JD.com Continues to Face Endless Headwinds
Stock Analysis & Ideas

JD.com Continues to Face Endless Headwinds

JD.com (JD) is a Chinese e-commerce giant with a stronghold in the consumer discretionary space.

The company is listed on the NASDAQ as an American Depositary Receipt (ADR), replicating one share of the firm’s underlying stock. I am bearish on JD ADR.

Website Traffic

TipRanks uses an artificial intelligence technique to track the correlation between JD’s website clicks and its stock price. Pricing assets with non-financial variables such as website clicks is quite popular these days as analysts have figured that they can be helpful indicators in predicting financial performance.

The algorithm forecasted the company’s traded market price and website clicks for March and was somewhat accurate in doing so, considering that JD is currently trading near the forecasted price target of $43.

Tracking website traffic is a structural way of looking at a scenario and should be coupled with a variety of reduced form variables such as macroeconomic and fundamental aspects.

Nonetheless, it’s proven that JD’s declining website clicks have led to a drawdown in its performance.

Fundamental Underpinnings

To analyze JD in a more reduced format, I decided to look at the fundamental underpinning that’s resulted in its ADR’s most recent capitulation.

The first matter that needs to be considered is China’s drawdown in real GDP growth. China’s real GDP growth has slowed by 78.14% during the past year as stricter leverage policies, and pandemic-induced lockdowns derailed the nation’s economic growth. Retail stocks tend to be heavily correlated with GDP growth, leading to declines in sales for JD.

Furthermore, JD reported a net loss of $0.53 per share during its fourth quarter, subsequently spooking the market with investors actively seeking profitable companies during trying times for the market.

The ADR controversy

An American Depositary Receipt synthesizes one share of JD; however, they’re not actual stocks. There’s been much controversy surrounding Chinese ADRs that keeps persisting.

The SEC wants JD to disclose its audit reports for the past three years as part of the “Holding Foreign Companies Accountability Act” and has threatened to de-list the firm’s ADRs from the Nasdaq if it doesn’t disclose the required information before the end of the month.

These regulatory quarrels have severe implications for JD stock as they may spook investors for quite some time. Even if the Chinese tech firm decides to disclose its reports, the fear will likely persist that such a situation may become recurring, which could, in turn, weaken the stock’s risk-return profile.

Poses Poor Sector Relative Value

JD isn’t the greatest value for money at the moment. The asset is trading at a P/E ratio of 27.4, which is 1.4x above the sector average.

In addition, the stock is trading at an EV/EBITDA multiple of 32.4, which reflects poor financial performance relative to the firm’s size.

Wall Street’s Take

Turning to Wall Street, JD has a Strong Buy consensus rating, based on 10 Buys and one Sell assigned in the past three months.

The average JD price target of $85.64 implies 86.3% upside potential.

Concluding Thoughts

JD stock is battling endless headwinds, and just because it has faced a drawdown doesn’t mean it’s undervalued.

Apart from its legal struggles, JD faces subdued consumer sentiment, and its ADR is overvalued relative to its peer group.

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