Fitting into my theme of investing in companies that can own the OS, JD.com is positioning itself to become a real player in online retailing. It has been one of the big players in the China market and it is looking to branch out to other parts of Asia. It is very aligned with other players like Tencent and Walmart and aggressively building out its retail ecosystem channels. The stock has been falling and some say the US trade tariff sabre rattling has put pressure on China stocks. In this episode I share my mind map exercise that I used to evaluate and ultimately led to my decision to buy into JD.com.
UPDATE #1: Since I made the decision, some significant news has come out. It was announced that Alphabet had made a $550 milliondollar investment in JD. I think its a big deal in that it validates JD's value proposition. JD has now entered partnerships with Alphabet, TenCent, and Walmart. These are companies that are aggressively trying to build out online ecosystems to own the OS for distribution in retail. Whoever can control that online platform has a good chance at building durable competitive advantage. Whatever happens, JD has connections with all the main players. The Alphabet connection also signals that both parties are looking to take on Amazon.
Update #2: Since the Alphabet announcement, more events have occurred, specifically from the Mad King himself, who pondering restricting Chinese companies from investing in American technology companies. I wonder now if the JD/Alphabet partnership is now in doubt given the Eye of Sauron is now looking upon China quite aggressively. I cite the potential of a tariff tit-for-tat as serious risk factor that could negatively impact JD.com and other China stocks.
UPDATE #3: Sold shares in JD.com (Ticker: JD) for 28.5 percent loss (Net Forex). This was a tough one. I still think the fundamentals of the business are quite solid as they are aggressively positioning themselves being the OS for retail in China and Asia. They have aligned themselves with some heavy weights (Walmart, Tencent, Google) to build out a formidable retail ecosystem.
So what changed my thinking? Math. The stock fell through the $30 level and my loss position was well over 20 percent. Basic math tells me that the stock would have to pop back over 25 percent to just get to break-even, which given the volatile nature of the stock is quite possible.
The other factor comes to governance. Richard Liu the CEO was arrested for alleged assault and then released in the US in August. He since returned to China. The police said the charges could not be substantiated and so he was released. There have been rumblings that this is not the first time this has happened and so there is a serious cloud on the leadership. Adding to this is that the management structure has been setup so that Liu because of his significant ownership of shares can still run the company. This is a big distraction and I think this will stick to the company.
I was down 28.5 percent which means the stock would have to up almost 40 percent for me to break-even which I think will be pretty tough under this current dynamic. Following my playbook on managing with losses, I decided to sell now and move on. It’s a tough one as at one point the stock was trading in the high $40’s and so I was in a good position. That’s the way investing goes sometimes.