Chinese stocks are out of favor right now. Investors in JD.com (JD), a Chinese online retail company, certainly know the feeling of buying into what feels like a "wall of selling" on a daily basis.
There are well-founded reasons for worry about Chinese stocks. Among the biggest risk to owning U.S.-listed Chinese stocks like JD is the threat of delisting, which has been brought about by the Biden Administration.
President Biden recently signed into law a Trump-era piece of legislation that requires Chinese firms to open their books to U.S. regulators. Citing national security law, China has refused to let U.S. regulators inspect the books of Chinese companies.
This has led to an immense amount of speculation that giants like JD could potentially be delisted from U.S. exchanges. Investors have increasingly priced this risk into even the best Chinese stocks. In many cases, large institutional investors don’t like the risk-reward profile of stocks like JD in this environment.
Given the shaky status of U.S.-China relations, it’s understandable that there will be political posturing for some time. However, the fact that Biden hasn’t backtracked this piece of Trump-era legislation is telling: the U.S. government seems to have little appetite for appeasing the Chinese.
In this light, it can be hard to understand why JD is a good investment right now. Indeed, the potential delisting poses a massive risk, and it’s enough to keep some investors up at night. (See JD.com stock analysis on TipRanks)
On the other hand, many investors may be correct in taking a bullish stance on JD right now.
Post-Pandemic Environment Should Be Welcomed By Investors
Aside from the aforementioned political risks, investors are concerned about the potential for slowing e-commerce growth in the post-pandemic world. In North America and Europe, such a view makes sense. People have been rushing to the malls like never before. At least, that’s what the stock prices of retail stocks look like right now.
However, in China, it’s a bit of a different game. The Chinese have aggressively adopted e-commerce platforms to an extent that American and European residents have not. Before the pandemic, China already accounted for 45% of global e-commerce sales. If anything, the pandemic only accelerated a trend that was on hyper-drive.
This phenomenon results from a variety of factors, but leads investors to an interesting line of thinking: perhaps e-commerce growth won’t slow as a result of the reopening. Instead, perhaps growth could actually accelerate as the economy heats up.
JD’s position as a fast-growth company shouldn’t be discounted. It’s a company competing with larger behemoths like Alibaba (BABA), but it is still gaining market share in a sector that’s absolutely exploding with growth right now.
In other words, JD is a faster-growing e-commerce play than most American companies, in a country with a growth rate well in excess of the U.S. It’s like Amazon (AMZN) on steroids (or Amazon Jr. if you think Alibaba is Amazon).
What Analysts Are Saying About JD Stock
According to TipRanks’ analyst rating consensus, JD stock comes in as a Strong Buy. Out of 17 analyst ratings, there are 15 Buy recommendations and 2 Hold recommendations.
As for price targets, the JD average analyst price target is $102.24. Analyst price targets range from a low of $80.00 per share to a high of $119.00 per share.
Bottom Line
JD’s growth rate shows just how cheaply valued this stock is relative to other high-growth plays. A 30% CAGR is certainly nothing to sneeze at.
However, the fact JD trades at roughly 20-times forward cash flows deserves consideration. Investors simply can’t find this kind of growth anywhere at this valuation. It’s among the highest-quality growth stocks in the market trading at this kind of a discount.
Risks certainly do exist in owning JD, especially relative to its American or European peers. However, there’s reason to believe this risks are more than priced in right now. At the valuation JD trades at, this stock provides investors with about as wide a margin of safety as one could ever hope for.
This is a stock investors could get excited about.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
Netflix (NFLX) is a global leader in the fast-growing streaming-on-demand entertainment business. It owns a massive customer network with a meaningful and growing presence in virtually every country other than China.
The main value for NFLX comes from its monthly subscription fee that it generates through its massive subscriber network. Meanwhile, its competitive advantage is boosted by its enormous content library and strong name brand that leads to significant customer growth in its newer markets. (See Netflix stock analysis on TipRanks)
The company also boasts sticky loyalty among its existing customers, and a massive trove of consumer data that it has accrued. It can leverage this data to better inform choices for new content production. That helps the company creates content that will best satisfy existing customers and attract new subscribers. It can also use its data to target advertising with maximum effectiveness to promote its products.
Thus far, the results have been terrific as revenue has exploded by over 17,000% in under two decades of operation. The stock has generated total returns that exceed the S&P 500’s by a jaw-dropping nine-to-one over that span.
Growing Competition
However, the company has run into some recent headwinds as major deep-pocketed rivals have poured into the streaming space, including Amazon (AMZN), Disney (DIS), and AT&T (T). While Netflix enjoyed a head-start in terms of customer network and industry-specific data and tailored content, each of these competitors has deeper pockets due to highly profitable core industries that can finance its investments into streaming.
Furthermore, all three of these companies have massive customer networks of their own from other businesses that have also given them significant consumer data banks. Moreover, Disney has a ton of existing and extremely popular video content that it has quickly loaded onto its Disney+ streaming service as well as numerous franchises with devoutly loyal fanbases (e.g., Star Wars) that it is leveraging to attract new subscribers.
Competition is clearly beginning to dampen Netflix’s growth momentum, as Q1 of Fiscal Year 2021 showed weak subscriber growth and management issued disappointing guidance for Fiscal Year 2021. Revenue growth appears to have peaked in 2018 at 35.1% and has decreased every year since, with analyst consensus growth targets of 18.9% in 2021 and 15.1% in 2022.
Valuation Metrics
Despite these headwinds, NFLX still possesses a significant head start in the space, giving it a significant edge to leverage in terms of consumer data and network. However, its valuation remains elevated despite a recent pullback in the share price.
The forward EV/EBITDA remains roughly in-line with long-term averages at 33.7x. That said, the Price to Normalized Forward Earnings looks more reasonable at 48.35x given that Netflix is expected to grow Normalized Earnings by a whopping 74.3% this year and 22.3% in in 2022 to $13.12. At the current share price of $599.3, that would put the P/2022 Normalized Earnings at 38.3x.
Wall Street’s Take
From Wall Street analysts, NFLX earns a Moderate Buy analyst consensus based on 26 Buy ratings, 6 Hold ratings, and 4 Sell ratings in the past 3 months. Additionally, the NFLX average price target of $599.3 puts the upside potential at 21.14%.
Summary and Conclusions
NFLX is facing significant headwinds right now given the entry of several deep-pocketed heavyweight companies into the streaming space. As a result, the company’s growth potential has weakened considerably and its growth rate seems to be in terminal decline.
That said, it still has a lot going for it, with a significant head start in terms of industry-specific consumer data collection and network effect. Furthermore, it already has a foothold in countries across the globe and millions of subscribers that are familiar with and loyal to its content library and style, making them less likely to switch to a competitor.
Overall, the stock does not appear extremely cheap, but could be good buy if the company will deliver on near-term growth expectations and it remains in the double-digits for the foreseeable future.
Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
Amazon (AMZN) is a leading e-commerce business with $482 billion in annual online gross merchandise volume. The company also has a rapidly growing and highly profitable cloud computing, storage, and database business (Amazon Web Services) as well as a few other smaller businesses, including advertising, Whole Foods grocery stores, and a cobranded credit card. While AMZN is considered a global mega cap with a market capitalization of over $1.6 trillion, the vast majority (73%) of its non-Amazon Web Services revenue comes from the United States. (See Amazon stock analysis on TipRanks)
AMZN’s retail business model is based on its user-friendly e-commerce website and massive product offering. Its competitive advantage is enhanced by its competitive pricing and fast, low-cost or even free shipping. Furthermore, the enormous volume of customers that frequent its e-commerce website enables it to attract a large number of third-party sellers, from which it earns host fees.
Amazon also sells advertising space on its website and further monetizes its network through Amazon Prime: a subscription that offers members enhanced free rapid delivery services, discount opportunities at Whole Foods stores, and access to a large library or streaming and music services.
Thus far, the results have been terrific as revenue has exploded by 940.6% over the past decade. Since its IPO, the stock has generated total returns that exceed the S&P 500’s by nearly 250-to-1,.
Mitigating Factors
Despite its strong growth, the company has run into some recent headwinds. First, it faces regulatory concerns, including the risk of anti-trust lawsuit. Secondly, its retail business is in a race-to-the-bottom for margins, as heightened delivery expectations from consumers make online retail increasingly competitive and expensive. Thirdly, the company is now being forced to consider entering new industries and international markets to keep its growth engine humming at a strong clip.
While it has proven over and over that it has an effective growth model that can be adapted to new industries, there is concern that the company has already grabbed much of the low-hanging fruit and has already entered the industries that are easily disrupted. Additionally, investors worry that the company may be competing on too many fronts to be truly effective.
Valuation Metrics
Despite these headwinds, AMZN still possesses considerable competitive advantages due to its exemplary brain trust, proven growth model, massive customer network about which it possesses immense sums of data, and an enormous Amazon Prime subscriber network.
The EV/Forward EBITDA still looks a bit high at 20.7x and the Price to Forward Normalized Earnings also appears high at 65x. However, the company’s numerous competitive strengths and expected continued strong revenue growth (26.9% in 2021 and 17.8% in 2022) and earnings-per-share growth (31% in 2021 and 31.7% in 2022) make it actually look very reasonably priced.
Wall Street’s Take
From Wall Street analysts, AMZN earns a Strong Buy in the analyst rating consensus, based on 31 Buy ratings in the past 3 months. Additionally, the AMZN stock price target of $4295.17 puts the upside potential at 33.96%.
Summary and Conclusions
AMZN has grown to a size where it faces mounting regulatory as well as industry challenges to its long-term growth outlook.
That said, the company has numerous exceptional competitive advantages and strong short-term growth prospects.
Last but not least, the stock’s price looks potentially compelling as a growth play and analysts are overwhelmingly bullish on the company.
Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.