If you’re going strictly by the print, JD.com (NASDAQ:JD) should be blowing up right now. Long dogged by a pernicious U.S.-China trade war, the two sides made significant progress in recent months. More specifically to JD stock, the underlying company released a resoundingly positive third-quarter earnings report. Yet shares slipped following the announcement and the red ink hasn’t let up.
InvestorPlace contributor Ian Bezek was much more blunt about the downfall in JD.com stock, labeling it “ridiculous.” If I only had the company’s hard numbers to reference, I’d probably be in the same boat. As Bezek noted:
JD’s earnings report beat expectations from top to bottom. Its revenue of $18.9 billion far outpaced analysts’ average estimate of just $18.3 billion. And its EPS of 29 cents smashed the average outlook of a mere 17 cents.
Beyond the big headline numbers, there were plenty of other positives as well. JD.com’s adjusted EBITDA of $600 million topped analysts’ average estimate by nearly 50%; analysts had been looking for just $412 million.
Its user growth accelerated last quarter, and its mobile user count surged 36% year-over-year. Additionally, the company’s services revenues grew by nearly 50%; as we’ve seen with Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN), the market positively loves recurring service revenues.
What in the heck happened? For one thing, JD.com stock and other Chinese investments rely on positive U.S.-China relations. Recently, President Donald Trump’s threatening China with punitive tariffs doesn’t bode well for meaningful negotiations.
Second, global economic concerns don’t do anybody any favors. That’s especially true for JD stock, with China being an export-driven nation.
But the bigger challenges come from these three longer-term headwinds, which I’ll discuss in greater detail below:
Too Many Rural and Poor People in China
On the surface, China’s massive population size helps support JD.com stock, along with other Chinese names. At last count, the world’s second-largest economy tallied up 829 million internet users. For perspective, that’s about two-and-a-half times more than we Americans have people.
Moreover, this figure will continue to rise. Experts predict that by 2023, China will have 975.1 million internet users. That would nearly triple the current U.S. population. Thus, many bulls argue, this is a great trajectory for JD stock.
Well, not really. As I just mentioned, China is a big country. Logically, 829 million internet users leaves well more than half-a-billion non-internet users. Most of these “disconnected” people live in rural areas who do not have access to modern education.
Plus, we should do the math. China’s GDP will probably come in around $14 trillion this year. With a population size of about 1.43 billion, that leaves a per-capita GDP of slightly less than $9,800. Therefore, the quality of their internet users is nowhere near the ranks of developed nations.
This doesn’t augur well for future growth prospects of JD stock.
Chinese Internet Trends Are Shockingly Poor for JD.com Stock
The quality issue for China’s internet revolution becomes more evident when you consider the ratio between internet users and the number of people. For JD.com stock to continue its growth narrative, it must have a viable consumer backdrop.
But you might be shocked to learn that the Chinese internet adoption rate is actually quite poor. For instance, by the end of this year, China will have 840 million internet users against a population size of 1.43 billion. That means only 59% of the Chinese population is connected online.
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Additionally, the picture doesn’t improve substantially over the next few years. By the year 2023, when China has its 975 million internet users, it will also have 1.45 billion people. Utilizing simple arithmetic, that amounts to a little over 67% connectivity ratio.
In sharp contrast, the U.S. currently has 86.5% of its population connected to the internet. And by 2023, it will have a whopping 94.2% connectivity ratio. In other words, Amazon can target virtually the entire U.S. population (because we have a smaller population than China but make more money).
At best, JD.com can target two-thirds of its population. Even then, that’s questionable.
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Ironically, China’s internet connectivity ratio should “improve,” but it won’t be a positive factor for JD stock. According to Chinese academics, the country faces a shrinking population. And one of the negative implications here is that younger people must deal with the fiscal liabilities of a rapidly aging population.
Unfortunately, this translates to a population base that cannot afford to spend money on discretionary items, hurting the longer-term case for JD.com stock.
All of China Is “Fake News”
Almost every American consumer is familiar with the Chinese retail junk trope. Indeed, one of the concerns about the trade war was that retailers like Walmart (NYSE:WMT) would take a beating.
Underlining this trope, though, is the well-known fact that China specializes in fake goods. According to any report you care to look up, China is number one for counterfeiting name-brand goods. Fiscally, we’re talking a billion-dollar empire of pure fakery.
Thus, it’s not surprising that we’re in a bitter trade war with China. This is a country that went full-blown Jason Bourne to steal intellectual property from Micron Technology (NASDAQ:MU). But up until President Trump came along, prior administrations turned a blind eye because of Chinese economic leverage.
I mention these things to demonstrate that China is a hard country to trust. And how is free market capitalism possible without it?
But this year, we saw a new low from the Asian juggernaut. According to an op-ed from South China Morning Post, journalist Yi Fuxian declared that China’s population size is “almost certainly inflated” to hide the generational damage from its “family planning policy.”
This is euphemism for forced abortions, which itself is euphemism for self-inflicted, and in many cases gender-based genocide.
There’s no way around it: the Communist Party of China is a morally dysfunctional administration. From an investment perspective, we cannot trust anything that the Chinese government says about their country. Sadly, this impugns the longer-term narrative for JD.com and JD stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.