E-Commerce China Dangdang Is in Danger

Online retailer E-Commerce China Dangdang (Nasdaq: DANG  ) is racing ahead into danger as its business slows. Despite revenues rising 53% year over year, it's suffering from a dramatic slowdown in the rate of growth in its operations. Active customers grew 23% in the second quarter to 5.7 million, but that's almost half the 44% growth rate it achieved in the first quarter, and was 6.5% below the numbers recorded then. Last year it notched better than 38% growth.

The drop in customers no doubt also led it to seeing total order growth fall (20% vs. 33% last year) as well as slowing growth in media revenues and general merchandise. At the same time, expenses rose, accounting for nearly 87% of revenues compared to almost 86% in the year-ago period. Slowing growth, rising costs, and widening losses are big red flags. Needless to say, Dangdang's stock is down 30% year over year.

E-Commerce China Dangdang snapshot

Market Cap $406 million
Revenues, TTM $699 million
1-Yr. Stock Return (30%)
Return on Investment (36.2%)
Est. 5-Yr. EPS Growth 53.3%
Dividend & Yield NA / NA
Recent Price $5.08
CAPS Rating **

Source: FinViz.com.

A dang shame
In the past I worried precisely about these growth issues at the e-commerce site. It was growing at exactly all the wrong points -- expenses -- and falling where it mattered. I also suspected it got off to a big jump in the markets because like every other me-too operation out there, investors were blowing it up as the Chinese Amazon.com (Nasdaq: AMZN  ) . Now that the mania has subsided, it's becoming clearer that a lot of the growth these stocks have achieved has been a result of government spending. With the economy coming in for a hard landing, they're not able to stand on their own.

Admittedly, I was swayed earlier this year by the analysis of my colleague Jeremy Phillips who suggested that unlike Renren (Nasdaq: RENN  ) (China's Facebook!) or Youku Todou (China's YouTube!), Dangdang positioned its business "closer to a consumer's wallet." It really is following Amazon's playbook of growing market share by sacrificing profits for the time being.

Laws of gravity
The fact is, China's economy is grinding to a halt. Even Beijing realizes that, which was part of the reason behind its announcement of a massive 1 trillion renminbi stimulus package. Yet as the Fool's Justin Loiseau correctly points out, don't think the Chinese consumer is going to benefit from this. It's a cash transfer to the coal miners and steelworkers as the spending plan is aimed at infrastructure. There may be some trickle-down benefits, but it won't be anywhere near enough to move the needle for companies like Dangdang.

The skid is showing up in the valuation of Internet stocks from large players like Baidu.com (Nasdaq: BIDU  ) and NetEase.com to smaller ones along the lines of Renren and Sohu.com (Nasdaq: SOHU  ) .

Value is what you get
While Dangdang forecasts 40% growth in revenues next year, the consensus analyst view is $1.1 billion in revenues, or a 38% growth rate. Once again, however, even Dangdang's estimate would be below the 42% increase projected for this year. And that may just be because its marketplace is a fairly limited collection of books and media items, not the sprawling supermarkets of its rivals. In one such as Amazon, it enjoys average revenue per user north of $540; Dangdang realizes just $34 per user.

The challenge for investors is whether they are willing to suffer through the near-term margin contraction in hopes that it will become a sticky site down the road, one that can regain the growth trajectory it once new. Intuitively you'd think the size of China's marketplace would permit that to happen, but as consumers are finding out there, the country was only able to ignore the laws of economics so far. Now the tab is coming due, but you can tell me in the comments section below if you think E-Commerce China Dangdang will be able to sell itself to the market once more.

A sky-high opportunity
Not just Chinese stocks have come a cropper; social media stocks have turned out to be way less than meets the eye. For even more on whether they might be worthy of a spot in your portfolio -- or not -- grab yourself a copy of brand-new premium research reports on Facebook. You'll also get free updates for a year as it reports earnings and other developments in its businesses occur. Sign up for your copy today.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Amazon.com, Baidu.com, and Facebook. Motley Fool newsletter services have recommended buying shares of Amazon.com, Baidu.com, Sohu.com, Facebook, and NetEase. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (14) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 13, 2012, at 4:17 PM, watch2012 wrote:

    Sorry shorty, but China is growing and you can't stop it. If you think that 8% growth is nothing then look at the USA. Your goal may to scare people, but the bottom line is China will continue to grow more that any other coutry, and that is good for Dang.

  • Report this Comment On September 13, 2012, at 5:31 PM, jeffcool wrote:

    I don't understand your argument. How is DangDang in danger? Even if their growth is slowing down it doesn't mean they are in danger? They have lots of cash and they are growing so where is the danger coming from? Remember the U.S. owe too mch debt from China and China has all the surplus.

  • Report this Comment On September 13, 2012, at 5:36 PM, jeffcool wrote:

    China's GDP is 7 trillion, which is already passing Japan's 5 trillion to become the world's no.2 economy. Their GDP is still below the U.S. which is about 15 trillion a year but it is catching up fairly quick. With 5 times more people no one in this world can ignore their market potentials. And just recently their internet population just passed the U.S. and Brazil combined, you know what that means for E-commerce?

  • Report this Comment On September 13, 2012, at 5:43 PM, jeffcool wrote:

    DangDang is not making money is because they are using the money to expand their infrustructures around the country. They are building warehouses and depots which cost money to build. It is like you have to spend money to make money first. But eventually they will turn around with profits and their profits may increase geometrically because they have a very good foundation and nice infrustructure to support them.

  • Report this Comment On September 13, 2012, at 7:45 PM, Hosana33 wrote:

    Wow i guess you couldnt write the lame article fast enough today and try to cap it.Yeah DANG is in real danger for shorts that is, like you punk! Just want to cover in the 5 area i see huh?With 1.5% of the pie DANG will grow for years and years.DANG is making all the right moves,2 years and we are at a 100 bucks.

  • Report this Comment On September 13, 2012, at 7:56 PM, lakerz wrote:

    Unbelievable!! They day this stock picked up a little based on Chinese and US stimulus packages, here come paid bashers with their irrational analysis :)

  • Report this Comment On September 13, 2012, at 8:39 PM, flat123 wrote:

    Motley has become a brand that is built upon sensationalism Motley team is comprised of opinion often based on reaction. Dang continues to make successful alliances and is No danger I am perplexed by the sophomoric editorial that only serves the ill informed Dang will survive even if market share in a country that is developing. Room for there approach and cash is not an issue Dang is relevant and it would seem that Motley post negative article when stock is up and other …articles that are positive when down… So Frat boys get your information correct as this article is the equal of seeking alpha and Motley is as credible as Star Magazine The company is solid And btw nice play words no impact on price

  • Report this Comment On September 13, 2012, at 8:42 PM, flat123 wrote:

    ass hles

  • Report this Comment On September 13, 2012, at 11:34 PM, jsIRA wrote:

    Please don't misleading or scare small investors any more!!!

  • Report this Comment On September 14, 2012, at 3:56 PM, Decoy0527 wrote:

    I don't know where DangDang's stock price is going, but I do know that too many writers, yourself included, equate China's slowdown (from 9% to 7%) to the very dismal slowdown in the USA. You fail to realize that Obama and Bernanke would kill for even 5% GDP growth. Not only does the USA not have 5%, they probably will not reach that for any year in the next decade. We are burying ourselves in debt. I do believe that the engineers and scientists who control China's economy are laughing at the lawyers who are running ours.

  • Report this Comment On September 15, 2012, at 8:28 PM, Singapore8888 wrote:

    Just for your information. DangDang is not only well-known in China, but also getting well-known in Asia. I am a Singaporean and I have brought a couple of items from DangDang as well as AliExpress. These items were sent to me via China mail services. I received them within 20 days from date of online purchases and very pleased with the product quality, pricing and they are undamaged upon delivery.

    The pricing from Amazon is so much more expensive than DangDang or AliExpress, thus they are better for Asians here to buy from them than from Amazon. Hopes this clarifies that the market for DangDang is not just limited to China, but also to asian markets like Singapore too. Thanks. :))

  • Report this Comment On September 15, 2012, at 8:51 PM, Singapore8888 wrote:

    Here is one of parent forums in Singapore about their purchase experiences from DangDang.

    http://www.kiasuparents.com/kiasu/forum/viewtopic.php?f=24&a...

    We cannot blame this Motley Fool's author for not knowing the real situation of DangDang's fast expanding into Asia, as je is most likely to be situated only in US. I am just very surprised that no-one seems to know that Asian countries are all starting to purchase via online from B2C companies like DangDang and AliExpress as well.

    Hopes these comments will stop all arguments or untrue articles that DangDang is in trouble, business going bad, and so on. I feel that DangDang is here to stay long, just like AliExpress (AliBaba) and Amazon. DangDang is a great B2C online experience in Asia here and will remain so. Cheers to all from Singapore!!! :))

  • Report this Comment On September 15, 2012, at 9:36 PM, Singapore8888 wrote:

    This is the one of many recent bulk order buying sprees involving DangDang and happening in Singapore. I am also waiting for the next B2C shopping spree to bulk order from DangDang again.

    http://www.singaporemotherhood.com/forumboard/messages/59002...

    There are many purchase forums like this for bulk B2C ordering from DangDang alone. :))

  • Report this Comment On December 08, 2012, at 12:26 AM, gaanmacai wrote:

    Rich Dupree may be scaring investors but look at what has happened to Dang since its IPO. A $30+ stock slammed down to about $4.

    I can't imagine how embarrassing this is for Peggy Yu Yu and her husband who was furious about how Morgan Stanley said their company wasn't worth even $8. Well, look at the facts. It has been a $4 stock for a long time. And to make things worse, Peggy Yu Yu promised to buy 1 million dollar amount of shares and STILL the stock is in the toilet. How is that saving face? It is not. Peggy Yu Yu and her husband have lost face over this one, and they cannot defend that.

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