We've been asking ourselves recently if the market has placed a fair valuation on JD.com. Let's dive into some of the fundamental values of this large-cap Consumer Discretionary company to determine if there might be an opportunity here for value-minded investors.
An Exceptionally Low P/B ratio but Trades Above Its Graham Number:
JD.com, Inc. provides supply chain-based technologies and services in the People's Republic of China. The company belongs to the Consumer Discretionary sector, which has an average price to earnings (P/E) ratio of 22.33 and an average price to book (P/B) ratio of 3.12. In contrast, JD.com has a trailing 12 month P/E ratio of 12.9 and a P/B ratio of 0.19.
JD.com's PEG ratio is 23.9, which shows that the stock is probably overvalued in terms of its estimated growth. For reference, a PEG ratio near or below 1 is a potential signal that a company is undervalued.
The Business Has Weak Operating Margins:
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $67,198 | $82,865 | $114,299 | $149,326 | $151,690 | $151,690 |
| Gross Margins | -1% | 15% | 15% | 14% | 14% | 14% |
| Operating Margins | 0% | 2% | 7% | 5% | 2% | 2% |
| Net Margins | 0% | 2% | 43% | 33% | 7% | 7% |
| Net Income (MM) | -$2 | $1,750 | $49,248 | $49,248 | $10,210 | $10,210 |
| Net Interest Expense (MM) | $202 | $772 | $4,989 | $4,989 | $305 | $305 |
| Depreciation & Amort. (MM) | $3,533 | $4,673 | $5,037 | $5,037 | $5,295 | $5,295 |
| Earnings Per Share | -$0.01 | $0.59 | $2.43 | $2.43 | $0.47 | $0.47 |
| Diluted Shares (MM) | 2,911 | 2,967 | 3,109 | 3,109 | 3,181 | 3,181 |
| Free Cash Flow (MM) | $3,127 | $2,489 | $6,520 | $5,765 | $7,510 | $7,586 |
| Capital Expenditures (MM) | $1,070 | $1,070 | n/a | $873 | $873 | $797 |
| Net Current Assets (MM) | -$2,557 | -$2,874 | $5,231 | $7,837 | $4,343 | $4,343 |
| Long Term Debt (MM) | $2,876 | $2,431 | $3,364 | $3,843 | $8,757 | $8,766 |
| Net Debt / EBITDA | -0.69 | -0.43 | -0.77 | -0.62 | -0.03 | 0.1 |
JD.com has exceptional EPS growth, low leverage, and growing revenues and decreasing reinvestment in the business. However, the firm has weak operating margins with a positive growth rate. Finally, we note that JD.com has similar gross margins to its peers and irregular cash flows.
