Chinese companies debuting on the NASDAQ and New York Stock Exchange have well and truly shaken off the bad press of a few years ago when accounting scandals and insider dealings derailed otherwise promising offerings. The recent buzz has been all about the filing of Alibaba for a full-fledged IPO later in the year. With all that market noise, the recent stellar debut of JD dot com (JD) has gone under the radar somewhat.
The IPO raised an eye-popping $1.78 billion by offering over 94 million shares at $19 per share. This made it the biggest IPO ever by a Chinese company in the United States. This price was a full 5% higher than the top end of the forecast range for the shares indicating strong demand even before the company hit the boards. The first days trading followed this theme with an initial climb of up to 10% up to $20.80 in an otherwise flat market, with the most recent close of $22.97.
So has the IPO of JD dot com broken the downtrend in tech companies generally because it has a superior business model or is it just a case of being a short-term flavor of the month?
Understanding the Business
The predecessor of JD dot com was founded all the way back in 1998, when Internet shopping was barely thought of and even Jeff Bezos and Amazon.com were struggling to build a completely revolutionary business model. The comparisons to Amazon don’t stop there, however, with the Chinese portal often described as the Amazon of China. The site sells everything from books to second hand clothes, as well as electronics, sports equipment, furniture and art.
It makes money by taking a commission of sales from transactions on the site, and also charging for advertising and priority placement on searches.
The company was exclusively designed and operated for Chinese customers and sellers until recently, when an English language version of the site was launched. The move brought the company squarely into competition with another global giant of Internet retail, eBay.
Metrics and Measures
As a new company comparable financial data is more difficult to come by than other more established businesses, but pre-IPO filings do provide some valuable insight into the operating model and metrics of JD dot com (JD).
As of 2013, the company commanded 18.3% of the Chinese market. This may not seem overly significant, but the fact is that 18.3% of a rapidly expanding and increasingly wealthy mainland Chinese market has far more blue-sky potential than a similar percentage of market share in any other market in the world. To get an idea of the size of that potential, leading research firm e-Marketer estimates that Chinese e-commerce sales are approaching a total of $180 billion for the year of 2014. To access that market, JD dot com can call on 30 million active members. These members drove revenue to dizzying heights, with the most recent figures showing that in nine months during 2013 company revenue was $8 billion, which was 70% higher than the previous period.
With those stunning tailwinds it is easy to see why many are excited about the stock, but there are also reasons for caution. Foremost among these are the fact that the company, unlike it’s rivals, has never made a profit. Indeed, the most recent profit / loss figure was $8 million in the red. While this is insignificant given the size of the revenues and operations, the company has signaled its intention to continue investing in infrastructure and software, and has forecast losses for some time yet.
The Investment Case
There is a saying in the business world: “When a gorilla enters the room, get out of the way.” There is no bigger gorilla in the Internet commerce market than Alibaba.com, founded by Jack Ma. The company is scheduled to debut on the stock market later this year in the biggest IPO ever, and is a direct competitor to JD dot com (JD). Alibaba holds over 80% market share in China, some four times more than JD dot com.
Because of this, the company CEO, Richard Liu, has signaled JD dot Com’s intention to use the IPO funds to fund acquisitions in the e-commerce market, in order to make up this market share. There is also a plan to focus on building the business-to-consumer model, as Alibaba is a more customer-to-customer or business-to-business based model.
However, the market is crowded, with eBay, Amazon, Alibaba and a host of smaller, more nimble and niche-focused rivals operating in different geographic locations and sub-segments.
In addition, there are questions about governance, with the founder retaining over 80% of the voting power in the company even after the IPO. To go along with that almost unsurpassed power, there was a one-off payment to him of $891 million following the IPO as a share- based bonus.
However, influential investors and company backers have supported those initiatives, arguing that jd dot com promotes stability and rewards the meteoric rise of the company.
JD dot com (JD) is a company taking a proven business model to the fastest growing and potentially largest consumer market in the world. However, it’s path to profitability is clouded, as it needs to invest to grow, and operates in a globally competitive field, with an aggressive and dominant player taking the majority of market share in its home market. There may be opportunity for short-term gains, but until a plan can be laid out to convert the billion-dollar revenue streams into profits, the long-term future of JD dot com is less certain.