At the Berkshire Hathaway annual meeting last May, Warren Buffett encouraged investors to look to China for investment opportunities. More recently, data showing a slowdown in China, concerns that a trade war may cause a recession, and currency pressures have hurt the stock prices of Chinese companies. One value that has emerged as a result is JD.com, the second largest e-commerce company in China.
JD.com appears to have about a 30% share of the business to consumer e-commerce market in China. It is a very popular site with Chinese consumers who rely heavily on it. The company's investments in infrastructure have been well publicized. Based on similarities in business models, it is often referred to as the Amazon of China. [Amazon has a relatively small market share in China.] JD.com appears to have built a strong and growing moat.
Although JD.com's roots extend back to 2004, it is still a relatively young company, making extensive infrastructure investments, with no positive earnings to report. However, in 2017, the company generated over $55B in revenue, after generating over $37B in revenue the prior year. Further, the company appears to have generated nearly $3.7B in free cash flow in 2017 after generating nearly $1B in free cash flow the prior year.
JD.com currently has a market capitalization of about $50.9B (the ADRs closed at 35.66 per share). This is less than one times 2017 revenues and appears to be less than fifteen times 2017 free cash flow. Even at a much lower growth rate than its past growth rate, a reasonable estimate of JD.com's intrinsic value, using conservative discount rates, would appear to be between $50B and $57B.
Disclosure: The author owns shares of JD.com. The author has not been compensated to write this article. This article is not a recommendation to buy or sell shares.
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