JD.com Earnings Surprise: China’s Outlook Better Than Expected

Key Points

• China's outlook has been anything but bullish lately until recent quarterly earnings results showed otherwise. 
• JD.com is the latest example of why the country's technology and consumer sector might soon benefit from all the fundamental tailwinds currently occurring. 
• All financial drivers are in place, and Wall Street now sees a double-digit upside ahead for the stock.

Most investors are unwilling to put their capital to work in overseas markets, as it is a more intangible idea, and they will likely not have the chance to see the companies they invest in at work or in person. More than that, geopolitical tensions and cultural differences make investing in China’s stock market a more complex consideration for most.

However, there are those on Wall Street who nearly carry the legend status on their shoulders and have found enough evidence and reason to start investing in Asia’s powerhouse. Before these names are revealed, investors need to understand that the trend for China’s economy is proving to be above what anyone had expected this year, with an outsized benefit to consumer discretionary and technology businesses in the country.

Among these favorites is Alibaba Group NYSE: BABA, a stock that is up by over 5% after reporting its second-quarter 2024 earnings results. Then there is Baidu Inc. NASDAQ: BIDU, which seeks to match the capabilities of Alphabet Inc. NASDAQ: GOOGL, which also saw preferential treatment from investors. However, the spotlight is placed on shares of JD.com Inc. NASDAQ: JD. This stock is up by over 5% the morning after reporting its second-quarter earnings.

JD.com Stock Proves All Growth Engines Are Still Firing

Media outlets have bashed China's economy and dismissed it as slowing since the COVID-19 lockdowns. However, data shows that for every month in 2024, inflation readings have been positive, and imports have been on the rise as well. This trend has many implications, including strengthening the consumer and business sectors.

Building on this momentum, consumer names like JD.com have come to shine. Digging into the company's quarterly earnings release, investors can find explosive growth rates, starting with revenue. Sales for JD.com stock jumped by 1.2% over the year, which only sounds like a little once investors realize it is a 19% compounded annual growth rate (CAGR) since 2018.

Revenue growth means little without increased efficiencies throughout the business, something investors can measure through operating income results. Operating income growth of 3.9% to outpace revenue proves to investors that JD.com stock is not only growing but also getting better at managing this growth.

Investors should look here when considering a potential investment in any business. Free cash flow (Operating cash flow minus capital expenditures) is the lifeblood of any business since it allows for debt repayment and reinvestment into further growth.

JD.com stock's operating cash flow grew by 24.4% over the year while capital expenditures contracted. This led to a free cash flow increase of up to 14.9%, allowing for continued growth and reinvestment into the company's driving forces.

Knowing that China's economy is just starting its cycle, Wall Street analysts decided to start placing a more realistic view on the company's growth prospects. Forecasting up to 7.6% earnings per share (EPS) growth will stay above China's inflation and GDP growth forecasts. Still, it is well below the 97.3% growth delivered over the past 12 months.

Wall Street’s Shifting Sentiment Signals Bullish Outlook for JD.com Stock

Realizing that growth forecasts might be below the actual path that JD.com stock is on, Benchmark decided to place a valuation on the stock that matches the company's fair value a bit more. Looking for the stock to trade at $47 a share calls for a net upside of up to 65.5% from where it trades today.

Seeing other big names jump on China's stock market could also trigger a wave of new buyers for JD.com stock. Names like Ray Dalio, who has been buying into the iShares MSCI China ETF NASDAQ: MCHI since 2023, Michael Burry, who recently purchased an additional 24% stake in shares of Alibaba, and even world-known macro investor George Soros is buying into China.

This could explain the wave of institutional capital that has entered JD.com stock over the past 12 months. Up to $1.2 billion of net inflows have been allocated to this Chinese technology blue chip, and given its recent growth, more might be on the way.

Facing these bullish factors, not even bearish traders wanted to stick around and get burnt by JD.com's future. The stock's short interest collapsed by as much as 16.3% over the past month, a sign of bearish capitulation as it also opens up more room for bulls to take their place.