Loop Capital downgrades this Chinese e-commerce stock, citing rising competition

Published Fri, Mar 31 20237:29 AM EDT

Investors should step to the sidelines on JD.com which is facing growing competition from Tencent, according to Loop Capital. Analyst Rob Sanderson downgraded JD.com shares to hold from buy, citing rising competition that he expects will weigh on the stock. "We continue to believe the company is undervalued and see potential for meaningful upside over the long-term, but no longer see conditions for valuation unlock in the near-term," Sanderson wrote in a Thursday note. "Our change of opinion is largely driven by two factors: (1) the company's decision to clean-up certain product categories (3-5% revenue headwind) will appear as share loss amidst increasing competitive concerns and (2) historic partner and investor Tencent is moving down-funnel to directly enable ecommerce transactions, further elevating competitive concern." JD YTD mountain JD.com's U.S. listed shares 1-day The U.S.-listed shares of JD.com have come under greater pressure over the past several years. This year, the stock is down 20%. It was lower by 18% and 20% in 2022 and 2021, respectively. The analyst's $49 price target, slashed from $82, implies just 10% upside from Thursday's closing price. The stock dipped by about 0.3% in Friday premarket trading. In the near term, the analyst expects that the e-commerce company could continue to get a boost as a reopening in China buoys discretionary categories. However, he expects that "Tencent's ecommerce ambitions will likely be an overhang, at best" as the multimedia conglomerate charges commissions for merchandise sales on its livestreaming platform. "There is still much to learn about Tencent's long-term ambitions in ecommerce, which may be viewed as a more narrow effort to match full-funnel capabilities of emerging competitor Douyin. This is however a change from Tencent's traditional position as a traffic funnel into other ecommerce platforms, typically investees like JD," Sanderson wrote. What's more, Tencent offloaded much of its stake in JD.com and its peers, which could "point to negative conclusions" for ecommerce partners like JD, according to the note. "While we see potential for long-term upside, the demand for Chinese equities remains low and we think other vehicles will appear more attractive to global investors over the near-term," Sanderson wrote. —CNBC's Michael Bloom contributed to this report.