Growth Investments May Delay JD.Com's Path To Profits

JPMorgan’s Alex Yao maintained a positive stance on the gross margin expansion outlook for JD.Com Inc(ADR) JD, while expressing caution regarding operating expense ratio outlook.

Yao initiated coverage of the company with a Neutral rating and price target of $29.

Positivity Tempered By Caution

The analyst explained the positive view of JD.Com’s gross margin expansion potential was driven by “1) 1P GM increase of consumer electronics, 2) 1P category mix to higher-margin categories such as home appliance and FMCG, and 3) revenue from 3P marketplace to outgrow that of 1P.”

On the other hand, the cautious stance on the operating expense ratio outlook was due to the company’s efforts to expand categories, as well as JD.Com’s “ambition to pursue non-ecommerce initiatives,” such as finance and cloud.

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Free Cash Flow

Yao expects JD.Com’s investment for growth to delay the company’s path to profitability, while pointing out “JD’s free cash flow-generating capability has increased meaningfully over the past few quarters and could continue to surprise on the upside as the company extends its AP days.”

The analyst believes there is ample room for the company to increase AP days, given the varying AP policy between JD.Com and its offline peers.

“Net-net, we think JD’s weakening margin outlook is offset by its increasing free cash flow-generating prospects,” Yao added.

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