JD Down After Q3 Print, But Many Analysts Remain Optimistic

JD.Com Inc JD plunged 5.3 percent Tuesday on news of its founder’s pullback from some of his CEO duties in the wake of an August arrest on suspicion of criminal sexual conduct. 

JD released underwhelming fourth-quarter guidance that overshadowed in-line quarterly results with better-than-expected gross profit. 

Here’s what analysts are saying. 

A Delayed Payoff

JD will divest many of its warehouse assets next year as the Chinese e-commerce company attempts to balance growth and profitability. Bank of America Merrill Lynch expects the strategy to reflect well on the balance sheet, although not for some time.

“We see moderating capex growth as the capacity for JD Logistics has ramped up and expect cash of RMB 10 billion ($1.4 billion) from future asset divestment,” said analyst Eddie Leung. “We still expect pressure on margins as the topline slows down, while we think cost measures will likely take time to yield.”

BofA anticipates earnings-per-share pressure in 2019 and 2020 given depressed sales growth, with margin improvements eventually expanding the bottom line.

While echoing concerns of revenue growth deceleration, KeyBanc Capital Markets forecast stabilizing R&D expenses and diminished start-up costs for the logistics segment.

At The Mercy Of The Macro

MKM Partners expects JD to fluctuate with the Chinese internet group, which is highly exposed to macroeconomic and geopolitical strife. In its assessment, company specifics matter little.

“We are hopeful of a more constructive discussion on trade coming out of the G-20 summit,” said analyst Rob Sanderson. “If not, the next event will be tariff escalation set for Jan. 1, then government data on consumption trends for January and February, which will not be released until mid-March.”

Structural Concerns

The circumstances are compounded by other variables in JD’s strategy.

“Uncertainty around renewal of Tencent's agreement and the CEO allegation present risk,” according to KeyBanc. 

Analysts anticipate additional instability in large-ticket products.

“We also expect slow growth in 2019 in smartphones due to secular pressure, home appliances due to cyclical pressure and apparel due to competitive pressure, together accounting for over half of JD's GMV,” according to UBS. 

The Ratings

• Bank of America maintained a Buy rating and $37 price target;
• KeyBanc maintained a Sector Weight rating;
• MKM maintained a Buy and $41 target; and
• UBS maintained a Buy with a $28 target.

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