Online discount marketplace Vipshop (VIPS 2.90%) is one of the lesser known names in China's booming e-commerce industry. Yet its stock has soared over 170% in 2014, thanks to its triple digit top and bottom line growth. Which of course begs the question: is this stock a hidden gem investors should keep an eye on?
Source: Ycharts.
Vipshop's business of selling excess inventory
Vipshop is a B2C (business to consumer) online retailer. Its core business strategy is to partner with well-known brands by buying and selling their excess inventory at discount prices. It then uses "flash sales" to keep customers coming back to its site.
Last quarter, Vipshop's revenue climbed 130% year-over-year to $882.6 million as its net income rose 130.3% to $27.7 million. By comparison, B2C rival E-Commerce China Dangdang (DANG) -- once called the "Amazon (AMZN 1.49%) of China" -- reported that its revenue rose 31.3% to $316.1 million in its second quarter. Dangdang only reported net income of $4.6 million, although that was an improvement from a net loss of $10.4 million in the prior year quarter.
Vipshop's growth is impressive, considering that it only controlled 2.8% of the B2C market in the second quarter. But that still puts it ahead of Dangdang and Amazon's Chinese site, which each controlled 1.5% of the market. Leaders Tmall and JD.com (JD 5.80%) respectively controlled 57.3% and 21.2% of the market.
The "Amazons of China"
Total e-commerce GMV (gross merchandise volume) in China rose 21.3% between 2012 and 2013 to $1.63 trillion, according to research firm iResearch. However, that's a notable decline from 28.1% year-over-year growth in 2012. iResearch expects YOY growth to decline to 16.8% by 2017.
But if we break down the total GMV (which includes business-to-business (B2B) wholesale trading) into categories, we see that Vipshop's main sources of growth remain healthy. GMV from online shopping on PCs is expected to grow at a CAGR (compound annual growth rate) of 17% between 2013 to 2017, while mobile shopping GMV is expected to grow 59%.
In 2013, mobile shopping GMV was less than a third of PC shopping GMV, which means that B2C companies will measure their future success by mobile visits. Last quarter, Vipshop reported that 57% of its total GMV came from mobile devices, compared to 17% for Dangdang.
Last quarter, Vipshop's number of active customers rose 137% year-over-year to 9.5 million as total orders rose 118% to 25.5 million. In the second quarter, Dangdang's active customers only rose 12% to 8.5 million and total orders grew 10% to 16.5 million.
Investors clearly notice the difference between Vipshop and Dangdang. Dangdang stock is up 32% YTD, but remains 20% below its IPO price of $16. Vipshop has rallied nearly 250% from its IPO price of $6.50. For the fourth quarter, Vipshop expects revenues between $1.2 billion to $1.22 billion, indicating YOY growth between 84% and 87%.
Source: Company website.
Addressing the risks
The main risk for Vipshop seems to be its lofty P/E of 122. However, investors should note that high P/Es are common among China's top e-commerce stocks. Dangdang, for example, trades at 253 times trailing earnings. Moreover, Vipshop's forward valuations look solid -- its forward P/E of 44 and 5-year PEG ratio of 0.77 both indicate that investors expect the company's bottom line and stock price to continue climbing.
Looking ahead, analysts expect Vipshop's annual revenue and earnings to respectively grow 65% and 76% next year. Those projections which could be hard to hit if China's retail slowdown drags down e-commerce numbers. In the first ten months of 2014, China's retail sales rose 12% year-over-year, down from 13% a year earlier. That's not alarming, but a prolonged decline could impact Vipshop's growth.
Vipshop's market share growth is also stagnant. The company's 2.8% share of China's B2C market is a notable decline from the 3% it controlled in the previous quarter. If it wants to grow that share, it needs to increase marketing expenses, which soared 171% last quarter to $47.1 million. Although that increase looks steep, it only accounted for 5.3% of net revenues, meaning that Vipshop still has room to increase its marketing expenses.
The road ahead
Vipshop's robust top and bottom line growth, growing footprint in mobile, and reasonable valuations indicate that the stock could still have room to run. The stagnant state of the Chinese economy and the need to increase marketing costs to remain competitive are risks, but I strongly believe that Vipshop is a hidden gem that investors shouldn't overlook.
