Ticker Reports for August 16th
JD.com Earnings Surprise: China's Outlook Better Than Expected
Most investors are unwilling to put their capital to work in overseas markets, as it is a more intangible idea, and they will likely not have the chance to see the companies they invest in at work or in person. More than that, geopolitical tensions and cultural differences make investing in China’s stock market a more complex consideration for most.
However, there are those on Wall Street who nearly carry the legend status on their shoulders and have found enough evidence and reason to start investing in Asia’s powerhouse. Before these names are revealed, investors need to understand that the trend for China’s economy is proving to be above what anyone had expected this year, with an outsized benefit to consumer discretionary and technology businesses in the country.
Among these favorites is Alibaba Group (NYSE: BABA), a stock that is up by over 5% after reporting its second-quarter 2024 earnings results. Then there is Baidu Inc. (NASDAQ: BIDU), which seeks to match the capabilities of Alphabet Inc. (NASDAQ: GOOGL), which also saw preferential treatment from investors. However, the spotlight is placed on shares of JD.com Inc. (NASDAQ: JD). This stock is up by over 5% the morning after reporting its second-quarter earnings.
JD.com Stock Proves All Growth Engines Are Still Firing
Media outlets have bashed China's economy and dismissed it as slowing since the COVID-19 lockdowns. However, data shows that for every month in 2024, inflation readings have been positive, and imports have been on the rise as well. This trend has many implications, including strengthening the consumer and business sectors.
Building on this momentum, consumer names like JD.com have come to shine. Digging into the company's quarterly earnings release, investors can find explosive growth rates, starting with revenue. Sales for JD.com stock jumped by 1.2% over the year, which only sounds like a little once investors realize it is a 19% compounded annual growth rate (CAGR) since 2018.
Revenue growth means little without increased efficiencies throughout the business, something investors can measure through operating income results. Operating income growth of 3.9% to outpace revenue proves to investors that JD.com stock is not only growing but also getting better at managing this growth.
Investors should look here when considering a potential investment in any business. Free cash flow (Operating cash flow minus capital expenditures) is the lifeblood of any business since it allows for debt repayment and reinvestment into further growth.
JD.com stock's operating cash flow grew by 24.4% over the year while capital expenditures contracted. This led to a free cash flow increase of up to 14.9%, allowing for continued growth and reinvestment into the company's driving forces.
Knowing that China's economy is just starting its cycle, Wall Street analysts decided to start placing a more realistic view on the company's growth prospects. Forecasting up to 7.6% earnings per share (EPS) growth will stay above China's inflation and GDP growth forecasts. Still, it is well below the 97.3% growth delivered over the past 12 months.
Wall Street’s Shifting Sentiment Signals Bullish Outlook for JD.com Stock
Realizing that growth forecasts might be below the actual path that JD.com stock is on, Benchmark decided to place a valuation on the stock that matches the company's fair value a bit more. Looking for the stock to trade at $47 a share calls for a net upside of up to 65.5% from where it trades today.
Seeing other big names jump on China's stock market could also trigger a wave of new buyers for JD.com stock. Names like Ray Dalio, who has been buying into the iShares MSCI China ETF (NASDAQ: MCHI) since 2023, Michael Burry, who recently purchased an additional 24% stake in shares of Alibaba, and even world-known macro investor George Soros is buying into China.
This could explain the wave of institutional capital that has entered JD.com stock over the past 12 months. Up to $1.2 billion of net inflows have been allocated to this Chinese technology blue chip, and given its recent growth, more might be on the way.
Facing these bullish factors, not even bearish traders wanted to stick around and get burnt by JD.com's future. The stock's short interest collapsed by as much as 16.3% over the past month, a sign of bearish capitulation as it also opens up more room for bulls to take their place.
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Warren Buffett's Recent Stock Moves: Top Buys and Sells to Watch
As the second quarter comes to a wrap-up for the stock market, so do the required 13-F filings for some of Wall Street’s biggest investors. This time around, Warren Buffett’s report card came in due to a shift in markets in one view and direction. Investors would greatly benefit from not blindly following Buffett’s moves but trying to understand his reasoning.
After some controversy in selling out of the technology sector, as up to 50% of Apple Inc. (NASDAQ: AAPL) was cut out of Buffett’s portfolio, and now that he seems to be doubling down on the energy sector through a 29% ownership stake in Occidental Petroleum Co. (NYSE: OXY), the writing is on the wall for what might be in store for the rest of the market in the coming quarters. However, there were two other selections that investors should take into account.
Consumer discretionary names weren’t of preference for Buffett this past quarter, as he sold out of his position in Capital One Financial Co. (NYSE: COF), probably because of the deteriorating state of the consumer credit market today. More than that, Buffett bought into Chubb Limited (NYSE: CB) for additional insurance exposure, a sector known to do well during inflationary times like today’s economy.
All Moves Point to a Single Strategy in Buffett's Latest Bets, Starting with Occidental Petroleum
A bullish view on Occidental Petroleum is also a bullish view on oil prices. Considering that the price per barrel is quoted in dollars, investors could also assume that Buffett is knowingly preparing for a potential weaker dollar ahead, which would make sense considering his other picks.
But, before investors dig deeper for a meaning behind Chubb and Capital One Financial, here’s what Wall Street analysts had to say about Occidental Petroleum stock.
A 33.3% earnings per share (EPS) growth forecast to begin with, justifying Buffett’s pick as a replacement for his reduction in Chevron Co. (NYSE: CVX) only expects 23.9% EPS growth.
More than that, analysts at Scotiabank felt confident enough to place a valuation of up to $80 a share for Occidental Petroleum stock, daring it to rally by as much as 38.6% from where it trades today. This new target would also call for a new 52-week high on the stock, reiterating the bullish outlook for the energy sector.
Tying it all together, analysts at Goldman Sachs reiterated their view for oil prices this year, pushing for as high as $100 a barrel for 2024. Keeping in mind that other dollar-quoted commodities like gold are hitting new all-time highs, it wouldn’t be far from reality to expect similar price action from oil.
Chubb Limited: The Ultimate Inflation-Proof Insurance Stock
Inflation helps businesses like insurance providers, as they can keep up their premiums with the inflation rate plus a margin of gain. Knowing Buffett's view that a weaker dollar is ahead, an insurance pick shouldn't be that surprising.
Besides its inflation coverage, this business is a classic Buffett play, with steadily increasing and predictable cash flows. While it may not be as exciting as an oil name such as Occidental Petroleum, it does show some bullish signs from Wall Street analysts.
Forecasting 8.7% EPS growth is one of many exciting features of this insurance provider. Still, price targets Keefe, Bruyette & Woods set started to point in a better direction.
A $305 a share valuation would call for a net upside of 11.8% from where the stock trades today, meaning a new 52-week high for additional confidence.
Buffett was one of many willing to invest in this stock. As of August 2024, Ameriprise Financial (Chubb's largest shareholder) had boosted its stake in the company by 1.3%. The asset manager's latest move brought its net investment up to $1.3 billion.
Capital One Financial Stock: Buffett's Final Move on the Dollar and Consumer Strength
With a weaker dollar, which can potentially be here, as investors have noticed in Buffett’s latest moves, comes weaker consumer demand. Also, inflation does erode the underlying financials of credit businesses like Capital One Financial. Because dollars are lent out and then repaid later with inflated currency, creditors take a loss on their loans during inflation.
By selling out of this company, Buffett’s view on the dollar couldn’t be more precise. Investors who aren’t yet clear about the potential adverse effects this company will experience during inflation can look to insider trades, notably the CEO’s.
Selling up to 61,532 shares as of August 2024 doesn’t spell confidence for the markets and investors.
Faced with the rise in credit card delinquency rates and collapsing personal savings rates, short sellers have been flocking to Capital One Financial stock during the past quarter, with an increase in short interest of 1.6% in the past month alone.
Considering that markets sent the stock into a discount on a price-to-book (P/B) basis is another confirmation for investors. Trading at a 0.9x versus the finance sector’s average 2.4x valuation signals that markets aren’t willing to pay for this stock, and there must be a reason for that.
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Sea Limited's E-Commerce and Fintech Strength Fuel Stock Surge
Singapore-based e-commerce, gaming, and financial services company Sea Limited (NYSE: SE) added to its ongoing stock rally following an earnings beat on Tuesday, with shares almost doubling in the last year heading into the end of the week. All three of the firm's major businesses experienced sales growth and strong profitability, though the cost of revenue remains a factor impacting net income. With continued signs that subsidiary SeaMoney is gaining a foothold in the competitive digital finance space, Sea is a company to watch closely going forward.
Company-wide, revenue for the second quarter was $3.8 billion, a 23% improvement year-over-year, with gross profit up 9% to $1.6 billion. Adjusted EBITDA across all three business lines was $448.5 million, down slightly from $510 million in the prior-year quarter and shy of analyst estimates. Total net income fell to $79.9 million from $331 million this time last year.
E-Commerce Wing Dominates, Driving Revenue Performance
Shopee, Sea's e-commerce subsidiary serving the broader Southeast Asian market, posted revenue growth of 34% to $2.8 billion for the second quarter, beating estimates of $2.68 billion. This impressive growth was a healthy combination of core marketplace revenue, consisting of transaction-based fees, ad revenues, and sales of value-added logistics services.
The good news for Shopee doesn't stop there. Gross orders increased sharply by over 40% year-over-year, and gross merchandise value (GMV) climbed 29% to $23.3 billion.
Chairman and CEO Forrest Li said Sea expects Shopee to continue to thrive going forward. The company has upgraded its GMV forecast to mid-20% growth, up from the high teens. Li mentioned that Shopee is expected to achieve adjusted EBITDA positivity starting this quarter, following a reported EBITDA of negative $9.2 million in the second quarter, a significant change from $150.3 million a year earlier.
To be sure, Sea can take none of this success for granted. The Asian e-commerce space remains highly competitive, particularly after rival PDD Holdings Inc. (NASDAQ: PDD) recently posted strong results for its e-commerce platform Temu, and JD.com Inc. (NASDAQ: JD) also beat analyst expectations.
Sea also continues to face an issue with high revenue costs for its e-commerce business. For the second quarter, cost of revenue was $1.8 billion, up from $1.3 billion the year prior, due to increased logistics costs alongside higher order volumes. This contributed to the company-wide cost of revenue of $2.2 billion compared with $1.6 billion last year. Higher cost of revenue was among the primary factors impacting net income last quarter.
SeaMoney Growing Fast
While Sea's e-commerce wing is well-established, its financial services division is less so. The latest results should help to drive investor optimism in this area. Revenue surged by more than 21% to $519 million, and adjusted EBITDA climbed by 20.2% to $164.7 million.
Like Shopee, SeaMoney faces fierce competition. But Sea has prioritized growing this portion of its business, particularly when faltering post-pandemic e-commerce demand prompted the firm to make significant cuts to its headcount. With the most recent quarter's results, it seems SeaMoney has found a customer base and built some stability.
Gaming Division Remains Solid, Despite Lackluster Revenue Performance
Sea's digital entertainment and gaming platform, Garena, noted impressive bookings and user data for the second quarter. Bookings of almost $537 million were up 21% year-over-year, while quarterly active users climbed by 19%. More importantly, quarterly paying users increased by almost 22% over this period. The gaming arm is led by Free Fire, a popular mobile game that saw over 100 million active players every day in the quarter.
Sea Limited's issue in this space is translating the above interest into consistent revenue performance. Revenue for digital entertainment fell to $435.6 million from $529.4 million the year before despite increased user engagement. Sea attributed this to lower recognition of accumulated deferred revenue from prior quarters.
Sea's second quarter strengthened Shopee's position in the highly saturated Asian e-commerce space and helped buoy its rapidly growing financial services business. Still, the cost of revenue weighed heavily on net income for the quarter. To best capitalize on the increased attention from customers and appeal to investors, the firm will need to address this concern in future quarters.
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