Insights

From a shop the size of a van to taking on Alibaba and Amazon

In June 1998 Richard Liu rented a four-square-metre retail shopfront in Beijing’s technology hub to start selling rewritable discs.

Today, 22 years after its bricks-and-mortar store was set up with only about $A2500, the name has changed from 360buy to JD.com (Jingdong) and is recognised as one of China’s e-commerce giants competing with the likes of Alibaba and Amazon.

The former one-man operation now employs 228,000 people in seven fulfilment centres and 31 distribution centres all over China.  The company also operates more than 800 warehouses with an estimated gross floor area (GFA) of over 20 million square metres.

From humble beginnings as a local store, the client base of JD.com has now ballooned to an estimated 441.6 million users, according to the company’s Q3 2020 financial results.

Strong financials

In August 2020, JD.com reported net profits of US$2.3 billion for Q2 of 2020.

Revenue climbed 30% to US$28.5 billion, which was about $1 billion above estimates. The company has achieved double-digit revenue growth every quarter going back several years and has been consistently profitable.

Share price performance

When JD.com listed on NASDAQ on May 22, 2014, the opening trade was at US$21.75. For the next three years the price action in the stock was relatively choppy, never managing to exceed the high of June 2015 at US$38.

A firm rally during the first half of 2017 saw the stock reach new highs but resistance in the zone of US$46 through to US$50.50 kept a cap on the topside. Many investors subsequently abandoned the stock in 2018 and it sank to a low of US$19.21 in November of that year.

However, the tide began to turn in favour of JD.com in early 2019 and by the start of April the stock was back above US$31. This marked the beginning of a broader re-rating of the stock by investors.

After a period of choppy consolidation in late 2019, with an underlying upward drift, the rally gathered momentum on 2020. Supported by relatively strong trading volumes, JD.com climbed to a high close of US$92.49 on November 6, 2020. This marks a gain of more than 180% in the space of 12 months and a gain of 380% from the low close of US$19.27 seen just two years earlier.

Periods of consolidation are to be expected after such strong gains and corrective dips cannot be ruled out.

However, while prices remain above support in the US$78 region our focus remains on the potential for an extension of the upward trend with gains beyond the US$100 level.

Turning challenges to opportunities

Though the road from a retail store to a global giant was not always paved and smooth, JD.com has turned most of the challenges it faced into opportunities. For example, when the Severe Acute Respiratory Syndrome (SARS) outbreak spread in 2003, the company tapped into the power of the internet to start selling products online.

Like other global companies that were affected by the lockdowns during the spread of the Covid-19 pandemic, JD.com had to respond quickly to changing market forces. But given its heavy investment in technology and logistical infrastructure, the company was able to take advantage of the unusual business environment.

During the company’s recent financial reporting season, Sandy Xu, JD.com chief financial officer, was quoted as saying: “We were facing a constantly evolving macro-environment with unprecedented complexity and opportunity.”

“As the domestic consumption is slowly recovering from the disruption brought by the pandemic, both the release of pent-up demand and a structural shift of consumer purchasing behaviour from offline to online have added to our strong performance in the quarter.”

An attractive investment and business partner

The company’s ability to pivot and use market challenges as a lever for growth made it an attractive investment vehicle for a number of other global players.

In 2014, Tencent – another tech giant known as the Facebook of China – acquired a 15% stake in JD.com and merged its e-commerce businesses with JD.com to build a stronger competitor to Alibaba Group.

Using each company’s respective strengths – JD.com’s estimated 170 million e-commerce users and Tencent’s large base of WeChat and mobile QQ users in China – the JD.com and Tencent tandem would prove to be a powerful combination in reaching more users and delivering products and services based on consumer behaviour and social media data.

The coming together of JD.com and Tencent is considered by many to have been a masterful strategic move that has enabled the two companies to compete with Alibaba – the more prominent e-commerce pioneer in China.

In June 2016, US retail leader Wal-Mart sold its Chinese e-commerce business to JD.com in exchange for a 5.9% equity stake valued at US$1.5 billion. Four months after its initial investment, Wal-Mart doubled its equity in JD.com. By 2017, Wal-Mart owned an estimated 12.1% of JD.com or approximately 289.1 million shares.

Another JD.com partner is Alphabet (parent company of Google) which invested US$550 million in JD.com in 2018. Based on corporate statements, the two companies are exploring the creation of next-generation retail infrastructure services.

What are analysts saying about JD.com

A recent survey of analysts covering JD.com showed that 39 of the 48 who cover the stock gave it a buy rating. Most analysts have also upgraded their earnings forecast for the e-commerce giant with the consensus earnings per share (EPS) estimate for 2021 at 45.5% year-on-year.

One analyst notes that while 2020 has been a challenging year for US-listed Chinese stocks amid the political uncertainties and the pandemic, JD.com has proved its resilience.

“JD.com has leveraged its supply chain, technology capabilities, scale advantages and cost-efficiency.”

Despite its soaring performance so far this year, “JD.com has potential to grow even further based on its favourable earnings and the overall growth of the global e-commerce industry,” the analyst added.

Another analyst who has been tracking JD.com for several years highlighted the company’s consistent performance.

“If you look at the past three years, JD.com’s stock has risen (dramatically). The company has grown its e-commerce business as well as expanded its new ventures and partnerships,” the analyst says.

The same analyst gave JD.com credit for expanding its network in Asia and its partnership with Wal-Mart to integrate its supply chain and customer resources in China.

Industry outlook and conclusion

Recent industry figures estimated China’s e-commerce market at US$1.94 trillion in 2019.

Despite the devastating health and economic set-back of the Covid-19 pandemic this year, it also brought to the fore the vital role of technology and the changing consumer habits around the world.

It seems like even with the anticipated arrival of vaccines, many people may still prefer to do their shopping online for years to come. And why not? Online shopping is more convenient, efficient and can save a lot of time.

Given its strong and consistent growth and expansion path plus the forecast rising demand and preference for online shopping and e-commerce, JD.com is well-placed for more growth and continued domination in the e-commerce space.

We consider it a Buy.


Alex Douglas is the managing director of Monex Securities Australia (AFSL 363 972), and is responsible for the overall growth of Monex in this region. He has held senior executive positions with numerous financial services companies both in Australia and Asia over the past three decades. Early roles in the industry included being a foreign exchange voice broker, a trader on the floor of the Sydney Futures Exchange and a senior analyst with Standard & Poor’s in Singapore.  Alex is a Certified Financial Technician (CFTe) and former board member of the International Federation of Technical Analysts (IFTA) as well as a sought-after author, speaker and market commentator.

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