China's E-Commerce Challenges And Food Delivery Losses Will Burden Margins

Key Takeaways

• Heavy investment in new businesses and intensifying competition risk prolonged margin pressure, losses, and difficulty achieving profitable scale.
  
• Demographic headwinds, regulatory risk, and geopolitical barriers threaten growth, profitability, and successful international expansion.
  
• Broad-based revenue growth, improving retail margins, rapid user gains from new services, and expanding global footprint position JD.com for enhanced profitability and reduced reliance on its domestic market.

Catalysts

Operates as a supply chain-based technology and service provider in the People’s Republic of China.

• JD.com's heavy investment in food delivery and other new businesses is leading to widening operating losses in these segments, with non-GAAP operating loss in new business reaching RMB 14.8 billion this quarter; if demand weakens or user growth normalizes, these investments may not achieve scale or profitability, resulting in persistent drag on group-level net margins and growing losses.
  
• More intense competition in China's e-commerce and food delivery sectors, particularly from entrenched rivals like Alibaba, Pinduoduo, and Douyin, is increasing customer acquisition costs and threatening JD.com's market share, making it harder to sustain revenue growth and placing further pressure on operating margins over the long term.
  
• Demographic challenges in China, such as a shrinking working-age population and slowing urbanization, could lead to stagnating consumer demand, preventing JD.com from scaling its user base as anticipated and resulting in slower future sales growth and lower gross merchandise value expansion.
  
• Heightened regulatory risk and the threat of further interventions by Chinese authorities could force JD.com to modify business practices, curb high-margin activities or absorb higher compliance costs, ultimately reducing profitability and negatively impacting both earnings and free cash flow.
  
• Geopolitical uncertainty and protectionist measures may continue to impede JD.com's international expansion efforts, restrict access to new technologies, and curtail global revenue streams, locking the company into a maturing and increasingly saturated domestic market where revenue and earnings growth are likely to decelerate.

JD.com Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on JD.com compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming JD.com's revenue will grow by 4.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 3.1% today to 1.8% in 3 years time.
• The bearish analysts expect earnings to reach CN¥26.7 billion (and earnings per share of CN¥11.65) by about August 2028, down from CN¥38.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, up from 8.2x today. This future PE is lower than the current PE for the US Multiline Retail industry at 18.0x.
• Analysts expect the number of shares outstanding to decline by 2.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.9%, as per the Simply Wall St company report.

JD.com Future Earnings Per Share Growth

Risks

• JD.com reported accelerated top line growth of 22 percent year-on-year in the second quarter, with broad-based double-digit growth across electronics, home appliances, general merchandise, and service revenues, highlighting strong demand and suggesting potential for sustained revenue and earnings growth over time.
  
• The company demonstrated 13 consecutive quarters of gross margin expansion in its core retail business, rising to 15.9 percent this quarter, signaling continued improvement in supply chain efficiency and operating margins, which could underpin higher long-term net profits.
  
• JD's successful innovation and integration of new business lines, particularly JD Food Delivery, have driven rapid user growth, with quarterly active customers and shopping frequency both rising more than 40 percent year-on-year, implying the ability to expand their addressable market and enhance revenue as cross-selling and user stickiness increases.
  
• Management reiterated long-term confidence in profitability expansion, targeting high single-digit profit margin over time as new businesses scale and integration synergies materialize, which could support overall group-level net margin improvement and higher long-term earnings.
  
• JD.com is executing a deliberate international expansion strategy, especially in Europe and the Middle East, and is focusing on building proprietary local supply chains and leveraging partnerships like the one with CECONOMY, potentially enabling the company to diversify revenue streams and decrease dependency on the domestic market, with positive implications for revenue growth and business resilience.

Valuation

• The assumed bearish price target for JD.com is $28.44, which represents two standard deviations below the consensus price target of $44.28. This valuation is based on what can be assumed as the expectations of JD.com's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.14, and the most bearish reporting a price target of just $27.98.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥1456.9 billion, earnings will come to CN¥26.7 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 9.9%.
• Given the current share price of $31.24, the bearish analyst price target of $28.44 is 9.8% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.