JD.com Is A Ticking Value Bomb About To Break Away

Key Points

• The Chinese economy is at a significant pivotal point, where its central bank is looking to stimulate the underlying landscape via rate cuts and other measures.
• JD.com is at the heart of the consumer recovery, demonstrating minimal downside in these technical and fundamental metrics.
• Improving fundamentals and massive tailwinds in the near-term future are poised to deliver a near doubling in the stock price.

The global economy is undergoing a significant pivot in each respective nation, where the aggregate effect of COVID-19 measures resulted in rampant inflation rates that spread across the globe, leading central banks everywhere to raise interest rates and decrease liquidity from markets. 

The Chinese inflation rate has fallen to negative numbers, or deflation, indicating that demand on both the business and consumer side has been lackluster at best. However, most people need to remember that these cycles are a natural occurrence, and the only way to go from here is up.

JD.com NASDAQ: JD is positioned to benefit significantly from the PCB's (people's Bank of China) reaction to these slowing trends, as the decision to lower interest rates at the fastest pace in the last decade will create major consumption tailwinds. Investors will realize why JD.com is more recession-proof than perceived and why this name severely understates the upside.

Little Downside, Lots of Upside

The first stop in this value potential trip is the stock chart, where investors can begin to understand just how little downside there is today.

Since the stock is trading at a price not seen since early 2020, which would also fall into a significant eight-year support level of $32 to $35 per share, fire sale valuations will likely limit any further selloffs or downside potential from today's prices.

JD.com analyst ratings are beginning to notice the unbalance, which favors the upside by a significant gap. A consensus upside of 65% from today's prices is only the beginning regarding the route map investors can follow for a 'promise land' investment.

Another way to analyze the balance between upside and downside, more traditionally, is by comparing today's valuation multiples across comparable companies. Taking PDD NASDAQ: PDD as a comparison example, JD.com becomes even more attractive.

Carrying a 15.0x forward price-to-earnings ratio, which values the next twelve months of earnings rather than the past twelve months, will make PDD 50% more expensive than JD.com's 10.0x multiple. Likewise, analysts see less upside potential in PDD, as ratings only suggest a 33% upside from today.

The landscape is set for the stock, tailwinds from everywhere, and favorable valuations. Yet, the stock is down by 3.3% on Wednesday's trading session. Did bears find a justifiable pitfall within the company's earnings release?

Fundamental Disconnect 

Within the company's earnings presentation, investors can begin to find some business logic to back up their consideration for a possible purchase. Remembering that the stock is trading at 2020 prices, comparing some key metrics between today and the past would be helpful.

Starting with net income margins, 2020 operated under 2.3% margins, while today's quarter will improve toward 3.0%. The push comes from an 8% advance in net revenues over the past twelve months, despite the underlying economy - and consumer - being in a recession. 

Free cash flow (operating cash flow minus capital expenditures) was reported at 33.5 billion RMB, an increase of 21% over the past year. The double-digit growth in free cash flow should have gone in tandem with a similar advance in the stock price, yet there was nothing.

Earnings per share finished the quarter at $0.59, compared to last year's $0.32. This jump of 84% should have - again - reflected a similar rise in the stock price since earnings typically drive stock valuations. There is a massive disconnect in logic here that a few brave value investors will be able to exploit.

The stock's decline this week cannot be attributed to earnings results, as everything within the release suggests healthy growing operations. It would make sense to assume that the current sentiment towards China, especially the stagnant growth figures, drives money away from names like this one.

Investors need to understand that the near-term timeline is filled with ticking value bombs, as the imminent effect of economic stimulus making its way down to the consumer level will bring JD.com into a new level of growth.

China has the fastest-growing middle class, a ripe audience to boost volumes and earnings once confidence returns as a push for more consumer spending across this demographic.

Investors now have the rare chance to witness fundamental and technical factors coming together to bring double-digit upside potential on a silver platter. 84% EPS advances during a recession will pale compared to the massive numbers investors can expect once the underlying trends recover.