JD.com (JD -0.53%), a leading e-commerce company in China, had a great year in 2021. Revenue grew 28% to a record high, and annual active customers reached a new high of 570 million.
But when JD announced its second-quarter 2022 results on Aug. 23, investors saw a substantial decline in revenue growth to just 5%. Those who expected JD to sustain its high double-digit growth rate were disappointed.
Still, investors should dig further into the earnings result to get a complete picture. Here are a few important things to know about JD's recent performance.
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Growth is slowing down, but profitability is improving
JD has been a solid growth machine, increasing revenue at a compound annual growth rate (CAGR) of 30% from 2016 to 2021. Its uninterrupted double-digit growth has, unfortunately, turned around lately.
In the second quarter of 2022, revenue came in at 268 billion yuan ($40 billion), up only 5% year over year. Product revenue rose 3%, while service revenue grew 22%. Investors were already expecting a weaker growth in the second quarter after JD reported slower growth of 18% in the first quarter of 2022. However, the rate still surprised to the downside amid the new COVID-19 pandemic lockdown in China in the second quarter.
But as revenue growth slowed, JD improved its efficiency and expanded its operating margin. As a result, income from operations surged more than tenfold, from 0.3 billion yuan last year to 3.8 billion yuan ($6 million) this quarter. Net profit advanced more than fivefold to 4.4 billion yuan ($7 billion).
On balance, JD's second-quarter performance was acceptable -- even though growth slowed materially -- since it still grew its top line amid the more challenging macro environment and significantly improved its profitability.
JD retail marched forward steadily
The global economy has gradually opened up for business as vaccination rates have improved over the last year. The Chinese government, on the contrary, continues to hold a strict COVID-19 control policy. So when there were significant breakouts in COVID-19 cases -- mainly in the first half of this year -- the government locked down a few cities entirely.
Such draconian control impacted the Chinese economy -- gross domestic product grew 0.4%, and retail sales fell 4.6%, hitting the lowest levels in the past two years. Despite operating in such a challenging environment, JD's retail segment grew revenue by 10%, beating the industry average by about 15 percentage points. Comparatively, Alibaba reported a 1% decline in its commerce business. The retail business also expanded its operating margin from 2.6% last year to 3.4% this quarter, thanks to the improvement in operating leverage .
Another important point worth mentioning is that JD Plus members (akin to Amazon Prime customers) exceeded 30 million in July. For perspective, Plus members spent eight times more than non-Plus customers in the second quarter of 2022. As JD continues to convert its regular customers -- close to 600 million -- into Plus members, it is in an excellent position to keep its growth wheel spinning.
A solid balance sheet to sustain JD's future expansion
Started mainly as an online retailer, JD has over the years diversified into other industries such as logistics, healthcare, and fintech. This horizontal expansion helps sustain JD's growth ambition, which explains its ability to deliver high growth rates over long periods.
But such expansion doesn't come cheap, since JD has to suffer years of losses while sustaining its high investments in these ventures. For example, JD Logistics barely broke even this quarter despite all the years of heavy capital investments and having the exclusivity of handling the parent company's e-commerce fulfillment and delivery.
Fortunately, JD has the firepower to sustain the capital needs of these young ventures. As of June 30, the tech company has 207 billion yuan ($30.9 billion) in cash and cash equivalents, restricted cash, and short-term investments. Besides, it has strong free cash flow, generating around 30 billion yuan ($4.5 billion) in the first half of 2022.
With this ever-growing cash stream, JD can afford to invest heavily in these younger but faster-growing businesses. Doing so will keep the company busy for many years ahead.
Buy, sell, or hold?
So what should investors do now? Frankly, there is no easy answer. Investors who cannot stomach the risks of investing in Chinese companies should avoid JD and other Chinese companies altogether.
But for those comfortable investing in Chinese companies, JD looks like an interesting candidate as it is trading at quite an attractive 0.8 price-to-sales ratio versus a five-year average of 1.5. And if you already own the stock, it may not be such a bad idea to hold on to it for a few more quarters. It won't be too late to sell it in the future if it cannot perform.
