2 risks investors need to know about JD.com stock

The past few years have been difficult for Chinese companies. Alibaba and tencent It turns out that stock prices have fallen significantly. This contrasts with corporate America, which has reached new highs. For perspective, Nasdaq Composite In 2024, it reached a new all-time high.

While most investors shy away from Chinese companies, contrarian investors are excited about Chinese technology companies thanks to low prices. Among them JD.com (J.D. -0.65%), a leading e-commerce company in China. Down over 70% from its peak, JD looks like a huge bargain right now.

Still, investors shouldn’t rush into JD stock until they consider the following risks.

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The Chinese e-commerce market is fiercely competitive.

JD is attractive to investors because it holds a leading position in the largest and still growing e-commerce market. First of all, the companies operate on similar business models. Amazon, has a large first-party business complemented by a third-party marketplace. We also own a logistics company, so we can deliver products to customers quickly and inexpensively.

However, unlike its U.S. peers, JD’s competitive market position has always been that of the second (and now third) most important companies by size. Initially, JD had to compete primarily with: Alibaba To increase market share. However, competition has become more intense in recent years with the emergence of latecomers. PDD Holdings (NASDAQ: PDD)Douying, better known as Pinduoduo (its platform name and former company name), is gaining market share at the expense of incumbents.

These latecomers have achieved success by leveraging new technologies and business models to satisfy customers. For example, Pinduoduo has expanded its presence in rural areas by leveraging smartphones and group purchasing business models to achieve the lowest prices by consolidating multiple orders before purchasing in bulk from factories. On the other hand, Douying leveraged its short video platform to gain an edge in customer acquisition and provide live streaming e-commerce services.

JD got off to a good start in economies of scale and built a competitive advantage thanks to its integrated business model, but it wasn’t enough to prevent these new players from gaining scale and market share. Constant changes in consumer behavior and unmet demand (China has a huge and growing retail market) make it difficult for any player to dominate. E-commerce giant Alibaba has also recently been having difficulty maintaining market share.

Intense competition is clearly reflected in JD’s most recent financials, with sales growth in 2023 falling to a record low of 4%. JD saw double-digit growth early on. By comparison, Pinduoduo’s revenue grew 90% in 2023.

If JD is to return to the investor limelight, it will need to demonstrate its ability to compete and succeed in defending its market share. The company has been working on strategies such as lower prices and better service to attract and retain users. Investors may continue to watch how these efforts impact JD’s market share in the coming quarters.

There is good reason for investors to be pessimistic about Chinese companies.

Once an attractive developing market for global investors, China has become a difficult (if not impossible) market for most U.S. investors to participate in in recent years due to increasing risks. First on the list are the political and regulatory risks that investors must endure.

Because the Chinese government exercises substantial control over the economy, it can and will implement policies it deems beneficial to the country, the party, and society, even if those policies come at the expense of industry and business. Recent crackdowns on the technology, private education and real estate sectors are classic examples of what can happen when businesses do not align with the government’s long-term direction.

Additionally, the cultural and governance differences between the medieval kingdoms and the West also became unbearable for most investors. Some persistent problems, such as limited disclosure, opaque accounting practices and generally weak management practices, make future predictions extremely difficult for most Chinese companies.

Additionally, ongoing tensions between major economies such as China and the United States could lead to trade disputes, tariffs, and sanctions, which could directly impact the profitability and operations of Chinese companies. The ban on Huawei and the recent decision to sell or ban TikTok’s business are examples of what can happen to Chinese companies.

With no end in sight to these problems, investors looking to buy Chinese stocks like JD have no choice but to take this risk. Naturally, many people are not willing to do that. This explains why demand for Chinese stocks has been sluggish over the past few years.

What does this mean for investors?

After reaching an all-time high in 2021, JD’s stock price was bound to decline. However, a stock’s poor performance means it is trading at a very attractive valuation. JD’s price-to-sales (P/S) ratio was 0.3, a significant discount from the five-year average of 0.99.

However, a low stock price does not guarantee a good return on investment. Unless JD shows good progress in defending its e-commerce market share or the overall perception of the risks of owning Chinese stocks improves, JD stock could remain a value trap for a long time. If so, owning the stock would have a huge opportunity cost even if the stock price doesn’t fall any further.