Unprofitable Chinese Internet company surges in IPO
Shares of JD.com (JD), a money-losing Chinese Internet company, jumped in their trading debut Thursday. Initially priced at $19, JD.com shares traded as high as $22.80 before settling down to the $21 range by mid-day Thursday.
Based on its IPO price, the company is worth about $26 billion. Put in perspective, that's more than 10 times as high as the $2.2 billion capitalization of New York Times (NYT), a profitable company founded in 1896.
The company's larger rival, Alibaba.com, is set to begin trading in the U.S. later this year. It is expected to be among the largest IPOs ever and may be worth as much as $200 billion.
In an interview with CNBC.com, JD.com Chief Financial Officer Sidney Huang argued that the company's successful IPO indicates that investors are confident in its strategy and that "longer term we have great prospects for very meaningful profitability." He added that listing in the U.S. raised JD.com's international profile and urged other Chinese companies to do the same.
Chinese stocks have been rocky in 2014 as investors worry about slowing growth in China. Jim Oberweis, manager of the Oberweis China Opportunities Fund (OBCHX), believes the dip in valuations makes this a good time to buy. The growth of the middle class in China is a powerful long-term investing theme, he says.
Other experts are urging investors to be cautious with hot China IPOs. "The U.S. is seeing a growing number of Chinese IPOs mainly because the mainland China regulator has reduced the number of IPOs approved for issuance in Shanghai and the Hong Kong IPO market has performed poorly," writes Kathleen S. Smith, Principal at IPO Advisory firm Renaissance, in an email.
"While U.S. investors are interested in owning shares of fast-growing Chinese entities, there is a limit to the amount of exposure," they should have to this sector, which can be volatile, she warns.
JD.com is similar to U.S. commerce giant Amazon.com (AMZN) and boasts 36 million active customer accounts. Like Amazon, the company generates big revenue -- $11.5 billion last year -- and and small to non-existent profits. The company lost $8 million last year.
China's commerce market is certainly huge. A McKinsey & Co. report noted that the industry has posted 120 percent compound annual growth rate since 2003. Sales were an astounding $190 billion in 2012.
But as Quartz recently noted in an article, some foreign investors are wondering whether the good times in China will last amidst signs the that the Chinese economy is slowing.
Keep in mind that's relative. The Chinese economy grew at 7.4 percent in the first quarter, the slowest rate in more than a year. That's well above the U.S. economy's sluggish 0.1 percent gain during that same time period.
Indeed, shares of JD.com lost some of their pop as Thursday's opening day of trading progressed, although the shares remained above their $19 offering prices. That means many investors are putting any concerns about the company and Chinese growth on the sidelines, at least for now.