Why E-Commerce China Dangdang Inc. Is Up 40% in 2014

It's been a good year for investors in China's leading online retailers. Vipshop -- the fast-growing provider of flash sales on brand-name apparel -- has seen its stock more than double through the first six months of 2014. E-Commerce China Dangdang  (NYSE: DANG  )  hasn't been as buoyant, but shareholders are unlikely to complain about the 40% return amassed during the first half of the year.

Dangdang got off to a strong start. In late February, it posted blowout quarterly results. The 22% uptick in revenue for the quarter and all of fiscal 2013 may not seem very impressive, given that most of China's publicly traded Internet retailers are growing substantially faster, but Dangdang did surprise the market with a return to profitability for the period. That was enough to make the Web-based seller of books, media, and other general merchandise a big winner during the first few months of the year. 

Dangdang's subsequent quarter wasn't so hot. Revenue growth may have accelerated -- up 30% for the period -- but weaker-than-expected top-line guidance tripped up investors. Bank of America downgraded the stock after the unflattering report, lowering its price target on the shares from $23 to $15. The move came as a sharp contrast to Vipshop, which itself posted better-than-expected results, with at least two analysts boosting their price targets following the well-received results. 

Mixed showings suggest that Dangdang hasn't earned this year's 40% pop, but have you been keeping tabs on investor appetite for China's online retailers? We've seen IPOs skyrocket and dot-com giants buying up stakes in leading e-tailers. Buzz about Alibaba going public in the coming weeks has only intensified the spotlight on e-commerce in the world's most populous nation. This has made the niche a fertile turf for investors with the risk tolerance to buy into China's growth darlings.

The second half of the year will be challenging. Dangdang will have to sustain its newfound profitability and, even though analysts see that happening -- expanding on that nicely in 2015 -- Dangdang's volatile history will result in Mr. Market's swift judgment if it doesn't deliver.

An earlier-than-expected return to profitability coupled with IPOs and M&A activity have made Dangdang popular. Sustaining the attention will be all on Dangdang.

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