Thread by @nsheth12

Why I think $JD is a $700bn+ company in 10 years (vs. <$150bn today).👇

This is a long thread and maybe not as exciting as watching $GME, but I think it'll be worth your time :)

1/ Chinese retail sales in 2020 were RMB ~40tn. 25% online = RMB ~10tn online sales. Let's say in 2030 total retail sales are RMB 70tn (inline w/ GDP growth) and online penetration is 50% = RMB 35tn online sales. That's 13% e-com mkt. size CAGR over next decade.

2/ JD's e-com mkt. share is ~20% today. What will their share be in 10 years?

3/ Bulls would argue that JD can gain share. They went from 16% share in 2016 to 20%+ GMV share today, and have gained every year, despite PDD entering. They are well-positioned for grocery, which will be the next big category to go online, thanks to their supply chain.

4/ The other argument for increased share is that wealthier customers prefer JD - as consumers in lower-tier cities "upgrade" and care more about speed + quality + CX, they will switch from PDD/Taobao to JD.

5/ OTOH, bears would argue that bulk of e-com growth will come from low-tier cities, where JD is weaker (though they have improved - 80% of new JD customers come from low-tier). Those customers will not switch to JD - they will "grow up" with PDD/Taobao.

6/ Let's stay neutral and say their share stays where it is. At 20% share, JD's gross GMV in a decade is RMB 7tn (vs. RMB ~2.5tn in 2020). Their GMV growth would be inline with e-com mkt. growth.

7/ What about margins? Mgmt. has said "over the long term, our first-party retail business should generate 1 to 2 percentage points higher net margin that the best run offline retailers. And layering on top of that, we'll have our marketplace business, which generates...

8/ a much higher accounting margin. So combining the 2, we should be generating somewhere in high single digit in a combined net margin for the business."

9/ Wow - HSD net margin. To put that in context, JD's current consolidated operating margin is <3%, and $WMT's net margin is <4%. Before I use this assumption, I want to front-run the common criticism that this margin expansion is not possible.

10/ Let's flow RMB 1000 of gross GMV through JD at scale. 50% is 1P, 50% is 3P, so RMB 500 in 1P GMV and RMB 500 in 3P GMV.

11/ On 3P side, 7% take rate (this is the current take rate) gives 500 x 7% = RMB 35 in marketplace revenue. @ 85% gross margin, this is RMB ~30 in gross profit.

12/ On 1P side, RMB 500 in gross GMV translates into RMB 235 in net revenues, after adjusting for returns, cancellations, & consumption tax.

13/ Let's say 1P gross margin expands from ~8% today to 12% in a decade due to mix shift from electronics -> general merchandise (higher GM) and somewhat higher markup.

Even Costco has 13% gross margin, so this is conservative if anything.

14/ And let's say fulfillment costs come down to 6% of 1P net revs, vs. 7.7% in most recent Q.

This is very possible w/ increased order density. In last mile delivery, greater order density -> more deliveries per courier -> margin expansion. Meituan is a case study of this.

15/ Putting it together, that's a 12-6=6% fulfilled gross margin, giving RMB 235 x 6% = RMB 14 fulfilled gross profit.

16/ Let's combine 1P and 3P. Total net revenue = RMB 35 (3P) + 235 (1P) = RMB 270.

Total fulfilled gross profit = RMB 30 (3P) + 14 (1P) = RMB 44 and total fulfilled GPM is 44/270 = 16%.

17/ Now here's the best part. Unlike WMT, TGT, and COST, JD doesn't have a store footprint to worry about, so most GP falls straight to the bottom line.

18/ Historically, JD has spent ~4% of revs on marketing, 2.5% on R&D, and 1% G&A. Total opex is 7.5% of revenue.

Opex scales better than anything else, so let's say marketing comes down to 3%, R&D to 1.5% and G&A to 0.5%. Now opex is 5% of revs.

19/ That gets us to EBIT, which is 16-5=11% of revs. At 25% tax, 11% EBIT margin = 8.25% net margin. That is the high single digit net margin that mgmt. has been guided us toward.

You can see why I think this margin target is realistic. If anything, it's conservative.

20/ So let's wrap this up. In 2030, we have JD doing RMB 7tn in GMV. I'm not going to go through the calculations again, but using the same assumptions as above, we get to RMB ~195bn ($30bn) in EBIT.

21/ At 20x EBIT, JD's retail biz alone is worth $600bn in 2030. Add in profits generated in the interim, JD Logistics, JD Digits, and other equity investments, and $700bn+ market cap seems quite reasonable.

22/ This doesn't include optionality from JD Health's telehealth business, or from reinvestment of the profits generated by Retail.

In the best businesses (and JD is IMO one of the best businesses), the value of optionality is almost always underestimated.

23/ With optionality, $800bn+ is not out of the question.

Obviously, nothing I say is investment advice. It's just my opinion. Do your own research before making an investment decision :)