Stocks to buy

Chinese e-commerce companies seem to be on a roll. Alibaba (NYSE:BABA) has been trending higher over the last few months, and JD.com (NASDAQ:JD) is not far behind. After an extended period of consolidation, JD.com stock has climbed 27% over the last three months.

JD.com Stock is Due For ore Upside in 2020

Source: Sundry Photography / Shutterstock.com

I believe that, from a technical perspective, the range of $29 to $31 serves as strong support for JD. I also think that JD.com stock is well-positioned to rally higher in the coming quarters.

From a macroeconomic perspective, the easing of trade tensions should push Chinese stocks higher. China’s GDP growth could potentially accelerate in the second half of 2020 or in 2021, benefiting JD.com, among others.

The Potential IPO of JD Logistics

In December 2019, it was reported that JD Logistics, JD’s logistics subsidiary, might be considering an initial public offering in the second half of 2020. The IPO could raise $8 billion to $10 billion, as JD Logistics is targeting a valuation of $30 billion.

It is worth noting that JD.com holds an 81.4% stake in JD Logistics. Therefore, the company’s stake is valued at $24.40 billion.

If the IPO does proceed according to plan, I expect value to be unlocked for the owners of JD.com stock. As of Sept. 2019, JD Logistics had approximately 650 warehouses in China, and JD.com may have the best logistics network in the nation. Given JD Logistics’ expansion in lower-tier cities and its adoption of new technology, it’s well-positioned for healthy growth.

An example of the subsidiary’s adoption of high-tech solutions is that it has already announced that it will launch a 5G-powered smart logistics park. Similarly, the company has been experimenting with drone deliveries in China and Indonesia. That initiative will help JD.com extend its reach.

Given JD Logistics’ ample growth potential, its IPO could be very profitable for JD.com, leading to gains by JD.com stock.

JD’s Improving Profitability Will Increase Its Free Cash Flows

The sustained improvement of JD’s gross margin is one of the key positive aspects of JD.com stock. Its gross margin has improved from 10.80% in 2014 to 14.7% for the quarter that ended in September 2019. I believe that the company’s gross margin and cash flows will continue to rise in the coming years.

One of the company’s key gross margin drivers is the increase in its percentage of revenue from products it sells directly to consumers (as opposed to products that outside vendors sell on its site). Its increased sales of  third-party logistics services, which tend to have relatively high margins, have also helped increase its margins.

China’s luxury goods market is pegged at $112 billion and has been growing at a healthy pace. Chinese consumers buy a third of the luxury goods sold worldwide. Importantly, the luxury goods market is going online. Companies like JD.com and Alibaba are aggressively expanding their luxury offerings.

As many as 20 fashion and luxury brands started selling their products on JD.com from April to June, the company reported last year. JD’s expansion in that area should boost its margins.

Additionally, in the 12 months that ended in September, JD.com reported free cash flow of $15.6 billion. I expect the company’s  FCF to increase in coming years. If my forecast proves to be accurate, JD.com will be able to use its funds to expand its core e-commerce business.

My Concluding Thoughts on JD.com Stock

JD.com has also been considering expanding further overseas. The company has already made inroads in Southeast Asia by launching an e-commerce platform in Indonesia. In addition, JD has invested in a Vietnamese e-commerce business, Tiki. I expect JD.com to aggressively expand in the region,  helping it maintain strong growth.

Analysts, on average, expect the company’s earnings per share to climb 37% in FY20.  The current price-earnings ratio of JD.com stock is 27.6, making the shares inexpensive. I expect its annual EPS growth to remain well over 20% in the coming years.

Considering JD’s positive catalysts, JD.com stock is worth considering for 2020 and for the long-term. Profit-taking could pull down JD.com stock in the near-term. However, any decline in the shares will create a good opportunity to accumulate this high-growth stock.

As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.

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