2 Long-Term Plays on Chinese E-Commerce

A concept you are most likely familiar with is the slang term "catching a falling knife"--buying a stock that has fallen precipitously in the hopes that share prices will eventually rise.  Unfortunately, falling knives can end up severely cutting into the returns of anybody who tries to grab one.

Well, it seems that our friend, Mr. Market, has decided to punish one Chinese online retailer with the falling-knife syndrome - LightIn TheBox (NYSE: LITB  ) . After the company went public in June, the stock soared; it later plunged an astonishing 50% in only eight days. 

LITB Chart

LightIn TheBox data by YCharts

Is this a sign that LightIn TheBox has underlying long-term weaknesses in its business model, or is this a market overreaction?  After all, several falling-knife companies deserve to see their stock prices depreciate, so why would LightIn TheBox be an exception?

LightIn TheBox provides investors looking to profit off of China's e-commerce trade a comparatively better option than competitor Dangdang (NYSE: DANG  )  However, Vipshop (NYSE: VIPS  ) might give LightIn TheBox some trouble if management doesn't continue to innovate and respond to consumer needs.

Consideration #1: LightIn TheBox is profitable and growing

LightInTheBox is a Chinese online retailer that is often nicknamed the Chinese Amazon or eBay. The company derives most of its revenue from -- surprise! Europe.  Europe accounted for 61% of LightIn TheBox's revenue, with North America and South America clocking in at 19%.  

Shares soared in the run-up to its first quarterly report as a public company. LightIn TheBox's unorthodox business model turned the heads of several investors. Expectations were flying sky-high, but those hopes were apparently not to be realized.

The company's earnings per share of $0.10 topped analyst estimates, but revenue growth of 53% to $72.2 million missed the consensus estimate by about $4 million. LightIn TheBox also downgraded its yearly revenue estimate, but enjoyed a whopping 140% user increase.

So let me get this straight. You have a profitable, growing online-retail company that has an advantageous market position and hundreds of thousands of consumers doing business with it...and the stock gets annihilated on the day of a quarterly report that missed one statistical expectation by $4 million?  Doesn't seem to make much sense when you compare LightIn TheBox's profitability with Dangdang's current inability to dig itself out of a negative revenue hole.  

Consideration #2: Vipshop Has Large Appeal

While I believe LightIn TheBox shares have fallen below a fair valuation of the company, there are some significant risks that investors should take into account.  I encourage prospective investors to research LightIn TheBox further before initiating a long position in the stock.

LightIn TheBox's management has openly admitted that the company's high-end business model did hurt sales in the last quarter.   Vipshop has successfully been able to market more to the middle class.  While Vipshop did offer a slightly softened outlook for the rest of 2013, it posted very robust numbers in the last quarter.  

What's good about this is that LightIn TheBox's management has recognized the problem and is hopefully working on the solution to that problem. Vipshop and Dangdang mainly have their operations centered in China anyway, while as already mentioned LightIn TheBox derives most of its revenue from overseas.  What is bad about this is that LightIn TheBox could lose the massive Chinese market to Vipshop and Dangdang if management doesn't focus on developing its domestic operations.  

Conclusion

If you want to effectively play the Chinese e-commerce market for the long haul, I would encourage you to take a look at both Vipshop and LightIn TheBox.  Dangdang's 30% run-up over the past year might not be sustainable if the company can't come out of the red. What Dangdang proved in the last quarter is that it is narrowing the gap and might soon return to the black, but LightIn TheBox and Vipshop are already in the black, and thus far ahead of Dangdang's game.

I do believe Mr. Market has unfairly punished LightIn TheBox since expectations got too carried away and many investors have become short-sighted about long-term priorities. Remaining LightInTheBox investors should hold onto their shares for the time being. Macroeconomic improvements in Europe's economy will also hopefully boost LightIn TheBox's bottom line.  If you're in for a volatile ride that might produce big returns in the future, then LightIn TheBox and Vipshop are the stocks for you.

The Economist compares this disruptive invention to the steam engine and the printing press. Business Insider says it's "the next trillion dollar industry." And everyone from BMW, to Nike, to the U.S. Air Force is already using it every day. Watch The Motley Fool's shocking video presentation today to discover the garage gadget that's putting an end to the Made In China era... and learn the investing strategy we've used to double our money on these 3 stocks. Click here to watch now!


Read/Post Comments (0) | Recommend This Article (9)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2608874, ~/Articles/ArticleHandler.aspx, 8/31/2014 12:38:47 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement