Research and Analysis firm MKM Partners has upgraded its opinion on the shares of Chinese online retailer JD.Com Inc (ADR) (NASDAQ:JD) and is consequently changing the rating from Neutral to a Buy. This comes on the back of JD’s share price falling on concerns over low margins and high competition especially from its bigger rival in the Chinese e-commerce market, Alibaba Group Holding Ltd (NYSE:BABA).
Though MKM has maintained a Buy rating on Alibaba with a price target of $220 per share, the research and analysis firm is confident that the online retail opportunity in China can accommodate two strong players. Additionally JD’s position is sustainably differentiated and the adoption of ecommerce in the world’s most populous country has been rapid. And buoyed by the Chinese government’s plan to raise domestic consumption levels in order to spur the next phase of economic growth, the results have been encouraging.
Gross margins
However, MKM Partners do not think JD will be able to increase its margins in a drastic way and are thus urging clients to buy the stock in its current weakness. MKM Partners has consequently issued a 12-month price target of approximately $51.
“Our new 12-month target of $51 [up from $33] is based on 22.5 times 2020 earnings power potential by 2019 discounted at 30% per year, implying multiple years of attractive return if our view is correct,” wrote MKM Partners.
Based on the gross margin metric, the second largest online retailer in China has emerged as the biggest in the context of its business model which relies on low margins and high volumes. It is expected that sustainable profitability will materialize as the gross margins improve.
Global expansion
The report by MKM Partners comes on the back of JD.com’s continued investments outside its domestic market of China with the most recent one being acquiring a stake in Go-Jek a ride-hailing startup in Indonesia. Other firms which have invested in Go-Jek include Sequoia Capital, Warburg Pincus and KKR&Co. At the moment most of the investments JD.com has made outside China are in China.
On Thursday shares of JD.com edged downwards by 0.87% to close the day at $42.07.
