Market Commentary: 1 E-commerce Juggernaut Flying Under the Radar

Sometimes the future arrives early and that certainly seems to be the case for JD.com, which owns a fleet of drones for rural delivery services that serve 30 million people in remote parts of China.

But JD.com (NASDAQ: JD) is far more than just another e-commerce player in the burgeoning Chinese market. With a market cap of around $43 billion and sales of $151 billion, many consider the stock to be grossly undervalued. Are they right?

Key Points

• Despite its strong fundamentals, JD.com is currently undervalued on paper with a market cap of around $43 billion.
• Analysts have estimated its fair value to be significantly higher, at $54 per share while a discounted cash flow forecast pegs fair value at $47 per share, around 70% higher than current levels.
• The company’s rising profitability and a 14.6x price-to-earnings ratio indicate strong upside potential.

A Robust Business Model

JD.com is a titan of industry that has built a significant moat through its nationwide fulfillment infrastructure and last-mile delivery network. The company owns its logistics, ensuring it has greater control over delivery speeds and service quality.

Despite going toe-to-toe with giants like Alibaba and Pinduoduo, it has managed to maintain a unique appeal to its customers. JD.com reported a Gross Merchandise Volume (GMV) in China in 2022 that was comparable to that of PDD, though Alibaba still reins supreme. Where JD differentiates itself is its focus on high-quality products, bolstered by fast and reliable delivery not dissimilar to Amazon in the US.

That has combined to produce scintillating financials. For example, each year over the past decade, JD.com has grown year-over-year revenues. Candidly, profitability hasn’t been anywhere near as impressive, though in the last fiscal year, that corner seems to have been turned with a reported $2.6 billion in operating income.

With a couple of billion in operating income and $150+ billion in revenues, you would imagine JD.com would trade at a valuation higher than $43 billion, but alas it’s not the case.

So, Why Is JD.com Priced So Low?

China stocks are not in vogue, plain and simple. Heightened tensions between the U.S. and China, coupled with domestic challenges like an economic slowdown and intense competition, have undoubtedly put a strain on JD.com.

But this is where the opportunity may lie for astute investors. Eventually the most substantial concerns are discounted into the share price and that time might well be now.

After all, analysts assess fair value to be at $54 per share, a full 100% higher than where the share price sits.

Undervalued Gem or A Diamond That Will Cut You?

JD.com is fundamentally a strong company that has shown resilience against stiff competition and has managed to grow impressively. It trades at a 14.6x price-to-earnings ratio, which appears to be a steal in light of the rising profitability.

No doubt, geopolitical concerns will keep some investors on the fence, but as the old saying goes when it’s time to buy you won’t feel like buying.

With analysts rating the share price 100% higher and a discounted cash flow forecast putting fair value at $47 per share, implying 70% upside, either target if realized would create a boon for new buyers.