Why JD.com's Oversold Shares May Rebound 9%

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

JD.com Inc.'s (JD) stock has fallen by 45% from its January highs around $50.50. Now with the stock trading around $27.60, shares may be ready to rebound by almost 9% based on technical analysis.

But, any bounce in the stock may only prove to be short-term. Analysts have slashed their estimates for the stock since the middle of May. Price targets for the stock have fallen as well. (For more, see also: Is JD.com Approaching Overbought Levels?)

JD Chart

JD data by YCharts

Technical Bounce

The stock appears to have put in a short-term technical double bottom, a bullish reversal pattern. Should shares rise, as the chart suggests, the next level of technical resistance comes at $29.90. Additionally, the stock has a technical gap in the chart, created when shares fell on September 5; it also suggests the stock price can rise.

The relative strength index has been trending lower since May of 2017 and is currently at levels below 30. It indicates that the stock may be oversold.

Slashing Estimates

Despite the short-term bullish technical charts, the longer-term outlook is still bearish. The average analysts’ price target has fallen by more than 20% since the beginning of the year to approximately $40.75 from almost $51.20. Yet, even that target may be too high, with earnings forecast to decline by 26% in 2018 to $0.40 per share versus 2017. Since the middle of May, analysts have cut the earnings estimates for 2018 by almost 43% from $0.62.

JD Price Target Chart

JD Price Target data by YCharts

Revenue estimates have also dropped over the past month by almost 1.5% to $68.5 billion from prior views of $69.4 billion.

The outlook for 2019 is almost as bleak, with earnings estimates falling by almost 25% to $0.90 down from a prior forecast of $1.19. Meanwhile, revenue estimates fall by 8% to $85.5 billion from $93.3 billion.

Not Cheap Enough

Even with the steep declines, the stock may still be overvalued trading at almost 31 times 2019 earnings estimates. Consider that competitor Alibaba Group Holdings Ltd. (BABA) trades at 21 times its one-year forward earnings estimates.

With JD stock getting hit so hard this year, it shares are likely due to bounce at some point. But, any bounce in the stock may be short term, with a longer-term outlook that seems uncertain.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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