JD.Com(ADR) (NASDAQ:JD) has started showing signs of a revival. The $550 million investment by Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) serves as the latest sign of this comeback. Although JD stock took a massive hit over the last four months, the equity has enjoyed a tremendous comeback in June.

Compared with Amazon.com, Inc. (NASDAQ:AMZN), it serves a larger home market with a more built-out infrastructure at a lower valuation. Despite the recent massive increase in the value of JD stock, the equity remains a great long-term play for retail investors.

JD Moves Higher

JD has enjoyed its best performance of the year. The stock lost 30% of its value between January and May as company spending and geopolitical concerns alarmed investors.

The reduction in the stock’s value created a tremendous buying opportunity. Now the stock has risen more than 20% since the beginning of June.

Its success in retailing earns the company comparisons with Amazon.

In earlier articles, I argued that Wall Street should consider JD and not Alibaba Group Holding Ltd (NYSE:BABA) the true “Amazon of China.” The $550 million investment by Alphabet will likely reinforce this perception.

With this cash, JD and Alphabet will partner to build out an improved retail infrastructure in multiple markets, many of which are in Southeast Asia. Alphabet will also receive 27 million Class A shares of JD.

Investors could also be left wondering whether Amazon should not strive to become the “JD.com of America?” Why AMZN stock outperforms JD remains a mystery to me. For one, JD is Chinese. I understand the mistrust from a geopolitical perspective, particularly with a looming trade war. However, China’s middle class alone has become double the size of the entire U.S. population.

Others on Wall Street have panned JD’s spending on infrastructure. In my view, that spending adds to the value of JD stock in the long run. And with that spending, JD has surpassed Amazon regarding vertical integration.

Not only does JD own products and invest in warehouse infrastructure, it also controls much of the delivery infrastructure to take its packaging to consumers. The Alphabet investment will further strengthen this infrastructure.

Contrast this with Alibaba, which acts mostly as a middleman and behaves like an innovation-oriented version of Ebay Inc (NASDAQ:EBAY). What few stores Alibaba has built out can likely be credited to competition from JD and other retailers.

Metrics Favor JD stock

In fairness, Alibaba and Carrefour SA (OTCMKTS:CRERF) (which is backed by Tencent Holdings (ADR) (OTCMKTS:TCEHY)) remain competitive threats. Still, such threats have not stopped JD from enjoying growth that surpasses that of Amazon. In 2017, Amazon grew revenues by 30.8%.

In comparison, JD increased revenues by 40.3% in 2017. Although Wall Street expects Amazon to outperform JD this year in revenue and profit growth, JD will probably see a higher level of growth in future years. Analysts expect the company will double profits in both 2019 and 2020. They expect profits will increase for Amazon by about 70% in the same period.

That generally higher growth comes at a much lower cost through buying JD stock. The forward price-to-earnings (PE) ratio of Amazon stands at about 137. Contrast that with JD with trades at 62 times forward earnings. From a PE standpoint, an investment in JD stock buys more earnings growth at less than half the cost of Amazon.

Also, the basic laws of mathematics work in favor of JD. AMZN stock holds the world’s second-largest market cap at about $834 billion. Even if one places little value on a $1 trillion market cap milestone yet to be achieved by any company, doubling AMZN stock one time takes the market cap to $1.66 trillion. Such levels could have investors questioning the value of the company.

On the other hand, JD supports a market cap of about $62.2 billion. It would have to double in value almost four times to catch up to the current market cap of AMZN. When one also considers how much of its home market remains to be tapped, JD will likely see a higher percentage of growth in future years.

The Bottom Line on JD Stock

As the Alphabet investment confirms, the growth potential in JD has only begun to be realized. The equity’s value fell by 30% this year on spending and margin compressions. However, that selloff appears to have become an overreaction to the stock’s China risk and spending on infrastructure.

Such expenditures give JD a higher degree of vertical integration than Amazon enjoys. Also, valuation measures, growth metrics, and growth potential favor JD over the much more expensive Amazon. Those who want to continue to profit from e-commerce will likely see more long-term profits by selling AMZN and buying JD stock.

— Will Healy

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Source: Investor Place