The Amazonian way

JD tests limits of Amazon's 'jam tomorrow' model

JD.com is testing the limits of Amazon's growth model. China's second largest e-commerce company has long sought to emulate the US web pioneer in internet retailing. It's now taking a similar approach to investing in new businesses. JD's sales may be growing quickly, but so are losses. The risk is that the company won't be able to fund these ventures for long, or that investors lose patience.

The $37-billion group is best known for selling home appliances and other goods directly to customers. Like the Seattle giant's direct sales model, this requires JD to finance and manage a large inventory while also maintaining a delivery network. That's costly: operating margins for JD's retail site are much lower than at rival Alibaba, which operates a less capital-intensive model of matching buyers with sellers. But it is also growing quickly: revenue from online direct sales jumped to 50 billion yuan in the quarter ending December, up an impressive 54 per cent year on year.

Just as JD was showing signs of turning a profit, however, founder Richard Liu is taking another page out of Amazon's business model by redirecting earnings from the core business into new ventures. For JD, these include forays into internet finance and so-called online to offline services, which connect users to local services and goods.

These have dragged the company into the red again. After stripping out share-based compensation, impairment charges and its share of loss-making minority investments, JD lost 662 million yuan after tax in the fourth quarter. By the same measure it made 83.8 million yuan in the previous year.

With full-year operating cash flow turning negative, JD's capacity to finance these risky bets is limited. This may explain why the company sold a minority stake in its internet finance division to outside investors in January. Shares of JD are now trading at 159 times forward earnings - a premium even to Amazon's sky-high multiple of 106. Investors may not be so tolerant for long.