The US retail giant has sold its entire stake in the Chinese e-commerce giant.
Walmart (WMT 0.13%) The company recently announced that it had sold its entire stake. JD.com (J.D. 2.25%)one of China's leading e-commerce companies. Walmart's exit was surprising, as it has been one of JD's major investors since 2016 and held a 9.4% stake in the company earlier this year.
JD's shares fell following the surprise announcement, while Walmart's shares held steady as investors digested the news. Here are three reasons why the retail giant parted ways with JD and why the sale might be a smart move.
1. Walmart will surpass JD.com
Walmart was struggling in China in 2016. Its brick-and-mortar stores faced stiff competition, and its Yihaodian e-commerce platform wasn't gaining much traction in the crowded market, so it sold Yihaodian to JD, initially taking a 5% stake in the e-commerce giant before doubling its stake to more than 10%.
Walmart and JD have worked together for years to expand delivery services — the two even co-invested in online delivery platform Dada, which they eventually took public. Dada Nexus (Dada -0.86%) February 2020.
Today, however, Walmart's China business can thrive on its own without JD. The company currently operates 286 Walmart Supercenters and 48 Sam's Clubs across China. Over the past few years, the China unit has reduced the number of Walmart Supercenters but increased the number of Sam's Club stores, which have seen strong growth by focusing on membership-based bulk sales and discount sales. Costco (Fee 1.84%).
Sam's Club also does about half of its sales online in China, meaning it no longer needs to rely on JD or other Chinese e-commerce marketplaces to drive digital sales.
As a result, Walmart's sales in China grew at an astounding compound annual growth rate (CAGR) of 10% from fiscal year 2019 through fiscal year 2024 (which ended in January of this year). Over the same period, Walmart's total revenue grew at a CAGR of 5%.
metric |
Fiscal Year 2020 |
Fiscal Year 2021 |
Fiscal Year 2022 |
2023 |
2024 |
---|---|---|---|---|---|
China net sales growth |
0% |
7% |
twenty one% |
6% |
16% |
Walmart's net sales growth |
2% |
7% |
2% |
7% |
6% |
2. Plans to reinvest cash into Sam's Club
Walmart plans to raise about $3.7 billion in cash from the sale of its JD stake, a chunk of which it plans to reinvest in the expansion of Sam's Club stores across China. The company is already aiming to open 10 new Sam's Club stores in China by the end of the year.
Walmart operates about 12 times as many Sam's Club stores in the United States as it does in China, and there is still plenty of room to expand the brand. The expansion could enable Walmart to gradually scale back its eponymous supercenter stores, which face stiff competition from other Chinese supermarkets, deepen its penetration into lower-income cities and widen its advantage over Costco, which operates seven stores in mainland China and 14 in Taiwan.
3. JD stock is no longer a good investment
Walmart might have held on to JD's stock if the stock had risen further, but over the past eight years, JD's stock price has risen just 3%. Over the past three years, it has fallen 58%.
JD's shares have fallen as its growth has slowed: The company's revenue grew an average of 27% annually from 2018 to 2021, but is expected to grow just 10% in 2022 and 4% in 2023. The slowdown was driven by China's economic slowdown and tough competition from the country. Alibaba (Baba -0.38%) and PDDD (PDD -4.09%)Analysts expect the company's revenue to grow at a CAGR of just 5% from 2023 to 2026.
JD's stock may look very cheap at nine times forward earnings, but it's trading at that discount because the company's high-growth days are over. Chinese antitrust regulators could block the company from fully expanding its ecosystem into adjacent markets, and continued tensions between the U.S. and China could put further pressure on the company's valuation.
So it makes a lot of sense for Walmart to sell its stake in JD and reinvest the cash elsewhere — and it's not abandoning its longtime partner by leaving open the possibility of a future partnership with JD.
What does this sale mean for investors?
The sale is good news for Walmart investors because it's a smart move to liquidate stalled investments and increase investment in China. But it's bad news for JD, which may remain stalled until it overcomes its long-term challenges.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Costco Wholesale, JD.com, and Walmart. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.