The Motley Fool

3 Areas Investors Should Focus on in JD.com’s Upcoming Earnings

JD.com Inc (NASDAQ: JD) is one of the leading e-commerce players in China, alongside Alibaba Group (SEHK: 9988) (NYSE: BABA) and Pinduoduo Inc (NASDAQ: PDD).

The company went through some challenging times in 2018 that saw its share price decline from US$50 to US$20 by the end of 2018. One of the main culprits that drove its share price performance was its weak financial performance in 2018.

Nevertheless, it seems like the company has finally resolved its issues in 2019. During the year, revenue growth accelerated while the company’s operating margin expanded. This resulted in a recovery of the share price to US$40 (as of writing).

Personally, in this piece I’d like to focus on three things in the company’s next results (which will likely be reported at the end of February) that will give me better confirmation of its recovery.

Margin

One of the main concerns that investors have when investing in JD.com is whether its business can generate sustainable profits over the long term. This is due to the company’s strategy of using low prices to delight customers, which results in low, or even no, profit.

So far, the company has done well in 2019 when it reported a 3.3% operating margin for the third quarter of 2019. This was an improvement from 2.8% in the first half of 2019. Bigger scale drove better procurement prices and operating efficiency, and consequently, better operating margin in the previous quarter.

Thus, I will again be looking for margin to expand further, or at least maintain its level around the 3.3% region in the next quarterly results.

Growth

One of the main reasons that drove JD.com’s stock lower in 2018 was its weakening growth. For perspective, the growth rate hit a low of 21% in the first quarter of 2019 after growing close to 50% compounded from 2012 to 2018 – RMB 41.4 billion (US$5.9 billion) to RMB 462 billion.

Nevertheless, there are signs that growth has resumed its upward trajectory after rebounding to 23% and 29%, respectively, in the second and third quarter of 2019. In particular, net service revenue for the third quarter of 2019 grew 47% year-on-year to RMB 16.0 billion, driven by its logistics business.

As such, I would like to keep an eye on the company’s growth rate for the final quarter of 2019. Hopefully, we can see a stronger, or at least, comparable growth rate for the quarter.

Other businesses

Another important area to focus on is the performance of other ventures like JD Logistics, JD Health, and JD Digits. These ventures are highly important to the company to sustain its high growth rate.

In the third quarter of 2019, these businesses grew revenue at 62%; much higher than the 27% growth rate of the retail business.

Personally, I will be looking for more information about the performance of JD Logistics, as well as its upcoming IPO. Also, I will want to know how its social e-commerce platform Jingxi performs over the quarter.

Foolish takeaway

JD.com delivered a good performance in the previous quarter, signaling that the worse is probably over for the company.

For me, the next quarter will give investors a good answer on whether such improvements are temporary or here to stay.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lawrence Nga doesn’t own shares in any companies mentioned.