3 Bold Reasons Walmart Said Goodbye to JD.com

Walmart (WMT 0.13%) recently revealed that it has sold its entire stake JD.com (JD 2.25%)one of the leading e-commerce companies in China. That exit was surprising because Walmart has been one of JD’s main investors since 2016 and still held a 9.4 percent stake in the company earlier this year.

JD shares sank after the sudden announcement, but Walmart shares held steady as investors digested the news. Here are three reasons why the retail giant parted ways with JD, and why this divestment could be a smart move.

Image source: Walmart.

1. Walmart has overtaken JD.com

Walmart struggled in China in 2016. Its brick-and-mortar stores faced a lot of competition, and its Yihaodian e-commerce platform wasn’t gaining much traction in a crowded market. That’s why he sold Yihaodian to JD and initially took a 5% stake in the e-commerce leader. He later doubled that stake to more than 10%.

Over the years, Walmart and JD have worked together to expand their delivery services. The two companies also co-invested in online delivery platform Dada, which eventually went public as Dada Nexus (DAD -0.86%) in February 2020.

But today, Walmart’s China business can flourish on its own without JD. It currently operates 286 Walmart Supercenters and 48 Sam’s Club stores nationwide. In recent years, its China unit has reduced the number of Walmart supercenters but increased the number of Sam’s Club stores — which are performing much better by focusing on bulk sales and subscription-based discounts, such as would be Costco (COST 1.84%).

Sam’s Club also generates about half of its sales online in China — it no longer has to rely on JD or other Chinese e-commerce marketplaces to drive its digital sales.

As a result, Walmart’s sales in China grew at an impressive compound annual growth rate (CAGR) of 10% from fiscal 2019 to fiscal 2024 (which ended in January). During the same period, Walmart’s total revenue grew at a CAGR of 5%.

Data source: Walmart.

2. He plans to reinvest his cash in Sam’s Club

Walmart raised about $3.7 billion in cash by liquidating its stake in JD and plans to reinvest much of the cash in expanding Sam’s Club throughout China. It already aims to open 10 new Sam’s Club stores in China by the end of this year.

Walmart may still have plenty of room to expand this banner, as it operates nearly 12 times more Sam’s Club stores in the US than in China. That expansion could allow Walmart to phase out its namesake Supercenter stores, which face tougher competition from other superstores in China, deepen its penetration in more lower-tier cities and widen its moat against Costco – – which operates seven stores in mainland China and 14 stores in Taiwan.

3. JD’s stock is no longer a great investment

Walmart could have kept its stake in JD if its stock had been rising. But over the past eight years, JD shares have risen just 3%. In the last three years, it has fallen by 58%.

JD’s stock tumbled as its growth cooled. Its revenue grew at a CAGR of 27% from 2018 to 2021, but grew only 10% in 2022 and 4% in 2023. This deceleration was caused by China’s economic slowdown and fierce competition from China. Alibaba (GRANDMA -0.38%) and PDD (PDD -4.09%). Analysts expect its revenue to grow at a CAGR of only 5% from 2023 to 2026.

JD’s stock might look very cheap at 9x forward earnings, but it’s trading at that discount because its high growth days are over. China’s antitrust regulators could prevent it from significantly expanding its ecosystem into adjacent markets, and lingering tensions between the US and China could further depress valuations.

So it made a lot of sense for Walmart to simply divest its stake in JD and reinvest its cash elsewhere. He’s also still leaving the door open for future collaborations with JD, so he’s not really abandoning his longtime partner.

What does this sale mean for investors?

This divestment is good news for Walmart investors as it is a smart move to liquidate a stagnant investment to step up its investment in China. But it’s bad news for JD, which could be stuck until it overcomes its long-term challenges.