JD.com: Why analysts see a 31% upside on the stock

China e-commerce leader JD.com’s potential brokerage deal could bode well, though its logistics spend might squeeze its margins, analysts say.

  • JD.com Inc (Nasdaq: JD) share price climbs 1.3% to US$85.13 per share
  • It is reportedly eyeing a US$1.5 billion stake in a brokerage
  • The group also signalled it may sustain spending on logistics
  • Analysts’ average target price imply 31.4% upside
  • Trade JD.com shares with an IG account

JD.com shares rebound

US-listed shares of China-based e-commerce juggernaut JD.com finished Monday on an upbeat note, rising 1.3% to US$85.13.

Its stock had slid 7.3% over the past week. Last Friday’s 6.7% day-on-day tumble followed a news report that the Beijing-based firm was looking to buy a US$1.5 billion stake in a brokerage. It also came after JD.com’s indication to investors that it may sustain spending on logistics and new initiatives.

Out of 53 analysts, 51 recommended ‘buy’ on JD.com shares and two had ‘hold’ calls. On average, their target price was US$111.86, according to Bloomberg data. That implies 31.4% upside based on Monday’s close.

Possible brokerage foray?

JD.com is in early-stage discussions to acquire shares in Shanghai-listed brokerage Sinolink Securities, and the stake it is eyeing could be worth at least RMB10 billion or US$1.5 billion, Reuters reported last Thursday.

The potential deal would see the online retailer buying part or all of the 27% interest held by Sinolink’s biggest shareholder, Yongjin Group. It will be JD.com’s biggest bet in acquisition value terms in China’s US$45 trillion financial market, Reuters noted.

‘The valuable brokerage licence is key for tech giants to monetise their huge online traffic and grow into bigger firms, as otherwise they have to direct such traffic to other financial institutions,’ Reuters reported.

JD.com signals spending spree

JD.com reported a higher-than-expected 31.4% year-on-year surge in revenue to RMB224.3 billion for the fourth quarter last year. Net income of RMB2.4 billion surpassed Bloomberg consensus estimates by 20%.

China’s biggest e-commerce firm by revenue flagged a spending spree to further ride the online shopping boom. Given the strong results, JD.com has a ‘strong foundation for investments’ in a range of growth opportunities, chief financial officer Sandy Ran Xu said last Thursday. She declined to forecast margins in the near term.

The group’s margins could face pressure as JD.com spends to expand its delivery network. Net margin in 1Q21 might drop one percentage point, partly due to investments in infrastructure, wrote Bocom analysts.

JD.com operates its own fulfillment network and logistics infrastructure, and owns the inventory for a sizeable portion of sales. ‘These strategies attract merchants and customers who demand high-quality goods,’ Bloomberg Intelligence (BI) analysts noted.

BI foresees JD.com’s profit to keep improving as it benefits from economies of scale and operating efficiencies. ‘The company’s increasing penetration of users from lower-tier cities may help to fund continued market-share gains versus offline retailers, even amid intense e-commerce adoption,’ BI analysts said.

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