Is Dangdang Worth More Than $4 a Share?

There's little doubt I'm bearish on E-Commerce China Dangdang (NYSE: DANG  ) , the Chinese Internet retailer that fashions itself as the Amazon.com (NASDAQ: AMZN  ) of Asia. My last diatribe warning that the e-tailer was heading into danger was met with a chorus of vitriol for doubting its growth potential. Yet the stock, which was trading at more than $5 a share at the time, has since fallen to around $4 a stub, a 20% loss of value, and I don't think it is quite finished.

Getting mauled
Part of my bear thesis was that China's economy has subsisted on and benefited from government spending, enormous amounts that artificially inflate values and lull investors into thinking that higher stock prices mean good fundamentals. Although my Foolish colleague Jeremy Phillips made a good point: that, like Amazon, Dangdang is sacrificing profits to grow market share. I think that moment is quickly passing the e-commerce site by and will be unsustainable when the laws of economics return home to roost.

Already Wal-Mart (NYSE: WMT  ) is gaining ground on its adversary through Yihaodian.com, a business of which it owns more than half. The global discount retailer plans to expand its operations tenfold in the coming year.

Of course, Wal-Mart has achieved varying success in China over the years with its bricks-and-mortar format, but the partnership with the homegrown competitor to Dangdang could mean it gains real traction, as would a renewed push by Amazon as it prepares to offer the Kindle to Chinese consumers early next year. A tag-team duo like Wal-Mart and Amazon could see Dangdang's meager advantages evaporate, not to mention local competition like 360buy and Suning.

State of confusion
Yet China's economy remains the biggest worry. China is on track to become the world's biggest online marketplace, with e-commerce sales tripling over the next three years to around $420 billion by 2015 if analyst guesses pan out. While some think the country bottomed in the third quarter of 2012, according to data compiled by Bloomberg an index of 39 Chinese companies shows they missed analyst earnings projections by more than 7%, in line with an economy expected to grow at its slowest rate in more than a decade.

Make no mistake, the U.S. would give its eyeteeth to achieve growth like that again, but government stimulus spending has distorted the view, and with Europe mired in a recession again and the U.S. economy flagging, hopes for any renewed vigor in the East is doubtful. The trend is apparent as marquee Internet names like Baidu.com, NetEase.com, and Sohu.com falter.

As expenses grew last quarter, Dangdang's own losses continued to widen, even if they were narrower than what Wall Street anticipated. As customer numbers dwindle, the market has grown increasingly worried it may not be able to get them back, and the stock's tumbled 63% since it hit record highs in April.

It's all the same to me
I'm not seeing any catalyst to differentiate Dangdang from the rest of its many rivals. While the stock does trade at less than half its sales, cheap stocks can often be cheap for a reason and arguments for recovery don't pan out as much as investors might hope. With revenue growth slowing, expenses growing, losses widening, and a consumer-dependent economy dragging lower along with the rest of the world -- not to mention rising competition -- there's no reason to think E-Commerce China Dangdang will regain its former glory or even be able to gain much altitude from here.

No doubt Dangdang bulls will say it's just a matter of time, but there are far better investment vehicles that can be accessed now instead of having to wait for some chanced-upon miracle. But let me know in the comments section below whether you should still give a dang about this e-commerce play.

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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 December 30, 2012, at 3:28 AM, Xavicat14 wrote:

    Don't agree at all.

    With the current growth rate, in 2015 sales can be at around 2B $ and if the margins stabilize at the current levels, the company will easily be profitable there.

    The company will finish 2012 with 830$ M in sales, 0 debt, more than 200 $ M in cash and and still growing sales at around 35-40% y/y.

  • Report this Comment On December 30, 2012, at 9:45 AM, Hosana33 wrote:

    Then why are shorts covering week after week and having a hard time of it as well ????

  • Report this Comment On December 30, 2012, at 2:32 PM, jhlblais wrote:

    Rich Duprey is a HORRIBLE writer who often gets his facts about companies....COMPLETELY WRONG.

    Dang RAISED its outlook last quarter....to the UPSIDE.....but does idiot Rich Duprey acknowledge this in his thesis ? No of course not because Rich is a PAID WRITER who writes articles for the short hedge funds he is paid by.

    So Rich's writings about companies are littered with lies and untruth's........just like a previous lie he wrote about DANG in a previous article when he cited a sales drop from Q4 of 2011 to Q1 of 2012 and he said the drop was alarming.

    But only a TRUE IDIOT like Rich Duprey would IGNORE the seasonal factor in ALL RETAIL COMPANIES called " CHRISTMAS " which often gives them their strongest quarter in Q4....and then a expected drop in the following Q1.........when I questioned this idiot Rich on this completely obvious season factor, the IDIOT ignored it and said the drop off in Q1 was not related to the season issue .......

    WRONG AGAIN IDIOT Rich Duprey......lol

    Motley Fool continues to tarnish its own name and brand by having idiots like Rich Duprey write for them............how sad......

    MF USED to be a name that people respected in the past before they resorted to printing stories by writers " on the take" from short hedge funds who print LIES about companies .

    How sad is that ?!!!!!!!!!

  • Report this Comment On December 30, 2012, at 10:37 PM, Hosana33 wrote:

    Regardless of whether Dang makes it or not, the Fool never comes up with anything original...they keep rehashing the same old material with different headlines. The writers are frequently incorrect in their "facts", they are void of competence and creativity, and they are obviously hired guns that write pros and cons for whatever hedge fund hires them. This is not objective journalism and more like an assassination for the benefit of, in this case, short sellers. They should disband this subpar, obscure and fledgling news agency in the name of journalistic integrity. BTW, Dang grew revs 44 percent on a YOY basis last Q in a challenging economic environment. If that is a recipe for disaster, I'll eat that food any day!

  • Report this Comment On December 31, 2012, at 1:56 AM, psboy wrote:

    Peggy YuYu and her husband have lost face. They are an embarrassment to all Chinese. It is laughable how the two promoted their company but have no investor support! After 2 years of going public, look at their stock price!

    A pathetic $4 stock!

    The world is laughing at Peggy YuYu and her angry husband. And their best reponse? You guessed right. DANG!

  • Report this Comment On December 31, 2012, at 9:51 AM, Hosana33 wrote:

    psboy,,,i guess you just joined today huh to bash DANG,,,,lol

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