Can Vipshop or Dangdang Become the Next Amazon?

Vipshop Holdings (NYSE: VIPS  ) and Dangdang (NYSE: DANG  ) have been two of the best-performing stocks of the last year, having exploded in popularity on the Chinese e-commerce scene. Yet as both companies strive to become the next Amazon (NASDAQ: AMZN  ) or Alibaba, which has the best outlook going forward?

Flash-selling to greatness
Vipshop is a China-based e-commerce company with extraordinary growth using a flash-sales business model. It has a customer base of 5.7 million users -- up 3.1 million, year over year, in the fourth quarter -- and has the right to sell more than 350 different brands at specific times for bargain prices. Essentially, the deals Vipshop is able to offer keep customers coming back and new customers signing up.

With that said, its stock has soared 575% in the last 12 months, including 45% in the last five sessions following fourth-quarter earnings. In its fourth quarter, revenue grew 117%, to $651 million.

The company provided first-quarter guidance at a midpoint of $645 million, which is much higher than the $554 million consensus. It is this degree of growth that has many believing Vipshop is the next enormous e-commerce company.

An Amazon-like model for growth
Dangdang is also a Chinese e-commerce company, but unlike Vipshop, it sells general merchandise on a platform that is very similar to Amazon's. Chinese companies are known for replicating high-profile, successful U.S. dot-coms. Sometimes it works, such as with Baidu.com replicating Google, and other times it does not, like Renren to Facebook. With Dangdang, its stock has soared 330% in the last year -- 77% in the last week. There are high expectations for the company.

Those expectations are not without good reason. In the company's fourth quarter, it accelerated revenue growth from a 19% clip to 22.1%, year over year. It also grew active customers 18% to 8.9 million -- higher than Vipshop -- and its first-quarter guidance of $282.8 million is far better than expectations of $256.6 million.

Becoming the next e-commerce juggernaut
While we have many reasons to be optimistic for the future of Vipshop and Dangdang, the big question is whether we're talking about the next Amazon, or perhaps just another Overstock.com.

To answer this question, we must first realize that neither company has anywhere near the scale of Amazon, a company with nearly $74.5 billion in revenue over the last 12 months. Moreover, with this size, Amazon maintains a growth rate in excess of 20% annually.

However, back when Amazon was the size of Dangdang or Vipshop, its growth far surpassed 20% annually. But as a company grows larger, its year-over-year growth naturally slows. For example, Wal-Mart in 1992 grew 35% with $43.8 billion in revenue, but now, with nearly $480 billion, that growth has slowed to the rate of GDP.

To find a quarter of similar fundamentals, we'd have to revisit the year 1999, and conveniently also the fourth quarter. In that particular period, Amazon reported revenue of $676 million, and grew 167%. From that point forward, the rest is history, as Amazon has continued to grow, invest in its business, and remains a juggernaut within the space.

Is either the next super e-commerce company?
In trying to identify whether Dangdang or Vipshop has the potential to keep growing and eventually become an Amazon-like force, it should be rather evident that Dangdang does not possess the necessary growth.

With $325.7 million in fourth-quarter revenue, Dangdang is of similar size to Amazon in 1998. In that year, Amazon grew revenue at 312%, which far exceeds the rate of Dangdang. At 1.36 times trailing 12 months sales, Dangdang is not particularly expensive, meaning if it can maintain its current growth rate, then gains will likely continue. However, it would be a far stretch to call Dangdang the next Amazon.

On the other hand, Vipshop's growth and fundamentals are very comparable to Amazon of 1999. Its 145% growth and $1.7 billion in total revenue for 2013 is also comparable to Amazon in 1999. In 2012, 2011, and 2010, Vipshop reported revenue of $692 million, $227 million, and $32.6 million, respectively, also comparable to Amazon.

The bottom line: Vipshop might very well be an early-stage Amazon, but even if not, Vipshop is nowhere close to seeing slowing growth. It has too much growth momentum. While at 5.6 times 2013's sales, it is pricey relative to Amazon, if Vipshop grows to become half the size of Amazon, then there are far larger gains ahead.

Final thoughts
Vipshop looks like a company that's firing on all cylinders. And while it shares many of the same characteristics of an early-stage Amazon, profitability might give Vipshop an edge looking ahead.

For example, Vipshop reported net income of $52.3 million for 2013, giving it a net income margin of 3.1% versus negative 1.4% in 2012. This level of efficiency is something Amazon has yet to achieve, and surprisingly, Vipshop has been able to earn these profits while still investing heavily in marketing, logistics, etc. -- the same investments that have prevented Amazon from reaching profitability.

With all things considered, its efficiency, upside, and growth make it more than worthy of its premium, as all signs point to Vipshop becoming a household name in the future -- one with the potential to yield large returns.

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  • Report this Comment On March 12, 2014, at 12:38 PM, alextzhang wrote:

    It's sad to read this story.

    It might not be the author's fault, but this is pretty far from Chinese reality of e-commerce. There is no mentioning of the real Chinese Amazon, which is JD.com, which will be filing for IPO soon.

    Dang has lost momentum, and its growth has to be compared to its peers, because the whole sector is growing very fast. Overall, Dang is lagging behind, not as described here.

    For fellow readers, check up JD.com's prospectus, you will see what I mean.

  • Report this Comment On March 12, 2014, at 2:03 PM, NoobOh wrote:

    Hate to say it... But if people do their research properly and read the filings of JD.com, they will know that the company can barely turn a profit on increasing revenues. The company managed to make a profit of $8-10million for the last 9 months on almost $8 billion dollars of revenues. What's the margin on that? Reasons why JD have such high revenues with almost NO PROFITS is because they basically sell a lot of consumer electronics for very low margins. JD is not the next Amazon. JD is the next Circuitcity, Buy.com (before they went private), or perhaps Bestbuy.com? Reality check will say Dangdang being closest to Amazon since their origins were the same. They both started the same ways and started expanding from there. JD only manages to survive because they are allowed by their vendors to keep extending their payables. Vipshop has very high profit margins. Dangdang is trying to follow that footstep into what makes money. If Vipshop decides to buyout Dangdang, that will form a powerhouse for e-commerce. Dangdang will be a very attractive buyout target even at today's valuation. Look into JD's filings and you tell me what percent their profit margins is? Isn't 8 million out of 8 billion less than 1%? Is that 0.01%? LOL!

    http://www.nasdaq.com/markets/ipos/filing.ashx?filingid=9301...

  • Report this Comment On March 12, 2014, at 9:50 PM, alextzhang wrote:

    Now, please read the book "everything store", describing Amazon. The point is that being profitable is not important at the early stage of e-commerce, building up a robust logistic system, and superior service quality are more important.

    JD.com, if you go through operational parameters, is very efficient, and they have built up the best distribution network and superior service quality, and taking market share from Alibaba in Beijing, Shanghai etc. Dang is not even a competitor anymore.

    As for the books, this is a disproportionally small category for Chinese e-commerce, big categories being 3C (electronics etc.) and garments (specially taobao). If you check out book sales, you can easily see how JD is taking over as well.

  • Report this Comment On March 13, 2014, at 2:51 PM, NoobOh wrote:

    JD.com is not new. Company was originally founded in 1998. E-commerce started in Jan 2004. They sell books during Dec 2010. Regardless of how you look at it, JD.com is bleeding cash and people will eventually realize that they are not what they thought the company is. If I am to bet on any company it will be Vipshop and Alibaba (Tmall). Dangdang is too small and most likely a good takeover candidate. They are making the right moves and shifting to being profitable which can make them sustainable and outlast those who bleeds money on a slowing economy in China.

  • Report this Comment On March 13, 2014, at 7:21 PM, gsgegm wrote:

    Dangdang has a long term story, a billion dollar story.

    VIPS looks like a classical story that smart Chinese fellows use a Chinese story to screw American investors. everything is designed to cash out and leave the questions to the future owners/investors/employees.

    - buy related companies (e.g. Lefeng) and pay 10 times of its worth

    - issue convertible bonds (book runners are its investors and analysts who cover the story)

    - owners/investors short sell the stock (no brainer)

    - no one understand their sales/profits number. go ask their auditor and see what they would tell!

    JD is a risky story that gets more traction. their numbers are honest though.

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