JD.com: Also Ran or Long-Term Compounder

Given their recent slide, I’ve started looking at Chinese Internet companies.

Tencent (TCEHY) is down a third from ~$60 to ~$40. JD.com is down even more, falling from ~$50 to ~$32 in a few months.

In this post, I will look at the latter; in a later post, I might visit Tencent.

At today’s closing price of $32.36, JD.com is a $46B market cap company.

Here is the quick thesis: massive and secular tailwinds, long growth runway, decent balance sheet, founder-led, long-term oriented company.

The risks are Alibaba (competitors have more scale), a margin profile that stagnates (empty calories), and its capital-intensive logistics turns out to be an anchor instead of a moat.

The mispricing exists because the reported earnings and margins mask the true earnings power. FCF generation is back-loaded, and not evident in quarterly earnings.

References

Here are some references in chronological order:

  • May 2016: Oracle of Omaha did a deep dive into JD when it was trading near $25. It is a extremely well-researched piece, worth reading in its entirety.
  • In May 2017, APS produced a short piece with a $12 target. Among other things, it claimed that JD was a hedge-fund hotel, margins wouldn’t expand due to Alibaba and its product mix, logistics and JD Finance were over-rated, and some reporting and accounting shenanigans. The stock traded around $40 at that time.
  • June 2017: The short thesis was rebutted by Oracle of Omaha and LG’s Musings. Since then, the stock soared to $50 earlier this year. LG’s Musings subsequently did a couple more posts on JD discussing the efficiency of its logistics, and contrasting it’s “promotional firepower” to Alibaba.
  • Jan 2018: John Huber discussed JD.com his Talk@Google. I found his metaphor of  “a turtle that survived” quite interesting. At that time, it was trading in the mid $40s. He did a back of the envelope 10-year calculation assuming sales go to $600B (~Walmart), and net margin goes to 3%. This would make the company worth about $270B at a 15x multiple. This would, in turn, imply a CAGR in the mid to high teens over a long period of time.
  • March 2018: With the stock now in the low $40s, Wiedower Capital in his interim letter presented another bull case. This is one of the best writeups on JD.com in my opinion, since it focuses on the few key drivers, and avoids getting lost in the weeds. He makes no special effort to put a dollar number on the stock, but argues that the company possesses characteristics of truly exceptional and rare firms.
  • May 2018: In their Q1 2018 letter, Hayden Capital presented another fantastic take on JD.com. The share price was ~$36 at that time. He did a quick SOTP, and concluded that once JD Finance and Logistics were valued separately, the core business was valued at $18/share or P/S ~ 0.3. For a business growing at ~25-30%, with improving margins, this is insanely cheap. In the recent past, margins have actually improved from 0.5% (2016) to 1.3% (2017) and are expected to be between 1-2% this year, despite the massive investment.

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