INTERNET – JD Shares Tank On Rising Costs, Return To Loss
Bottom line: JD’s quarterly results look typical for recently listed Chinese Internet firms, showing fast-growing revenues and soaring costs, which will pressure company stocks in 2015 as short-term investors leave the space.
Reality is finally coming to Wall Street, as investors dumped shares of e-commerce giant JD.com (Nasdaq: JD) after it reported earnings that looked strong but not quite good enough to justify the company’s meteoric valuation. The bigger question now is whether the 7 percent drop in JD’s shares marks the beginning of a much-needed correction in their price. Regular readers will know that my answer to that question is a definitive “yes”, and that the coming correction won’t just be limited to JD but will also hit leading e-commerce firm Alibaba (NYSE: BABA) and many other recently listed Chinese Internet stocks.
Personally speaking, I do think that many of these companies do have good potential and should be able to maintain revenue growth rates in the 30-80 percent range over the next 5 years. But rises in their stocks have been far faster than that, meaning prices have probably gotten a bit ahead of what most of these companies are really worth.
JD.com is a perfect case of what I’m talking about. The company went public in May, pricing its American Depositary Shares (ADSs) at $19 each. Those shares rose as high as $33 — up nearly 75 percent — in August when investor enthusiasm was at its height for such companies. With the 7 percent sell-off after its results, the shares now trade at $25. That’s a bit of a correction, but still 32 percent ahead of their IPO. It also makes the company worth about $35 billion, more than half the value of much older US peer eBay (Nasdaq: EBAY).
All that said, let’s look at JD’s actual earnings, starting with its top line revenue growth of 61 percent to $4.7 billion. (company announcement) Gross merchandise value (GMV) — the value of total goods trading over its sites — grew at a much faster 111 percent. That discrepancy was partly due to fierce competition in the market.
In another sign of the fierce competition, JD said its sales and marketing costs soared 134 percent in the third quarter to $143 million, rising far faster than revenue or even GMV. Chief rival Alibaba saw a similar trend in its third quarter results, reporting its sales and marketing costs nearly tripled to $285 million.
The bottom line was predictable for JD, which returned to the red in the third quarter with a $27 million net loss after briefly reporting a profit last year. That kind of sudden move to profitability, followed by a return to losses, is quite typical for companies preparing to make IPOs, as they use accounting tricks to make themselves more attractive to investors before their listings. JD’s outlook for the current fourth quarter was also pretty typical, with the company forecasting revenue growth of about 60 percent.
In short, almost everything about JD’s report looked quite typical of the kind of Internet company that we’ve seen go public from China lately. Revenue growth is relatively attractive at more than 50 percent, but that’s largely offset by exploding costs due to stiff competition, which ultimately pressures companies’ bottom lines.
Such stiff competition is now the norm in most Chinese Internet spaces, including not only e-commerce but also online travel services, video and games. Investors don’t seem to mind the fact that profits aren’t growing as quickly as revenues, and that many companies like JD are still losing money. But that reality is likely to become more apparent next year, as many of the short-term buyers that bought the stocks to make some quick money sell down their stakes and look for the next hot area.
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