UPDATE: MKM Partners Cuts JD.com, Inc (JD) to Neutral on Concerns About Competitive Dynamic
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(Updated - September 20, 2016 10:45 AM EDT)
MKM Partners downgraded JD.com, Inc (NASDAQ: JD) from Buy to Neutral with a price target of $27.00 (from $32.00). Analyst Rob Sanderson said he is cautious on the near-term competitive dynamic as Alibaba (NYSE: BABA) becomes more aggressive.
"We are concerned that Alibaba is preparing to step up competitive intensity and that it may be a slower margin ramp for JD than we had previously expected," said Sanderson. "We continue to believe that JD has a differentiated position, can grow at/above the market rate and can be a sustainably profitable business over time. While we still see very good risk/ reward over the long-term, we are incrementally concerned about near-term dynamics and prefer to step aside and revisit later."
"For several years, BABA has been bolstering its presence in the consumer electronics category, a historic stronghold for JD and was 53% of sales in 1H’16. BABA’s efforts in the category have been increasing, from a logistics/ after-sale support partnership with whitegoods maker Haier in Dec-13 to a sizeable investment ($4.5Bn) in offline electronics retailer Suning a year ago," continued the analyst. "We think BABA’s assault on the smartphone category is a newer focus and that its intention is to make it impossible for JD to earn a positive margin in the category. We think that a difference today vs. 1-2 years ago is that BABA has turned the corner on its monetization ramp. This provides management more flexibility to engage in aggressive competition to fulfill a strategic agenda."
Sanderson added, "As an online marketplace, BABA does not control pricing or inventory and starting a price war is not a simple action. We do not think large branded flagship stores want a race to the bottom on smartphone prices even if BABA were to incent them and we do not think smaller resellers have enough market power to impact JD’s economic model. Whether BABA can be successful remains to be seen, but does elevate the risk profile in our view. We are not comfortable recommending the stock with this competitive uncertainty."
Shares of JD.com, Inc closed at $26.05 yesterday.
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