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JD.com, Inc. (NASDAQ:JD) Investors Are Paying Above The Intrinsic Value

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I am going to run you through how I calculated the intrinsic value of JD.com, Inc. (NASDAQ:JD) by taking the expected future cash flows and discounting them to today’s value. I will be using the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in February 2019 so be sure check out the updated calculation by following the link below.

Check out our latest analysis for JD.com

Is JD fairly valued?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.

5-year cash flow forecast

2019

2020

2021

2022

2023

Levered FCF (CN¥, Millions)

CN¥12.96k

CN¥15.70k

CN¥17.35k

CN¥26.54k

CN¥34.31k

Source

Analyst x7

Analyst x7

Analyst x4

Analyst x3

Analyst x3

Present Value Discounted @ 15.72%

CN¥11.20k

CN¥11.72k

CN¥11.19k

CN¥14.80k

CN¥16.53k

Present Value of 5-year Cash Flow (PVCF)= CN¥65b

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We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.7%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 15.7%.

Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = CN¥34b × (1 + 2.7%) ÷ (15.7% – 2.7%) = CN¥271b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = CN¥271b ÷ ( 1 + 15.7%)5 = CN¥131b

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is CN¥196b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $20.1. Relative to the current share price of $25.11, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

NASDAQGS:JD Intrinsic Value Export February 7th 19
NASDAQGS:JD Intrinsic Value Export February 7th 19

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at JD.com as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 15.7%, which is based on a levered beta of 1.787. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For JD, I’ve compiled three relevant factors you should look at:

  1. Financial Health: Does JD have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Future Earnings: How does JD’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of JD? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.