Since its IPO in March, VIPshop Holdings (NYSE: VIPS ) has returned 265%. That's right, you could have tripled you money in less than a year! And though it may be enticing to ride with the bulls, let's not get carried away. VIPShop may seem like a great business, but we foreigners have dealt with online, flash sales sites before. And the economics don't seem great for investors.
At the end of the day, I think VIPShop's success relies solely on three macroeconomic trends -- three trends that would help any specialty e-commerce company flourish in China.
Based in Guangzhou, China, VIPShop is the "Gilt.com of China." The e-tailer partners with domestic and international brands (Bossini, Disney, Nike) to offer Internet shoppers time-limited discounts (stretching across several days) on premium, limited-quantity clothes and lifestyle items.
There are definite positives for a bullish case. After partnering with local delivery companies S.F. Express and China Post's EMS, VIPShop has hit a 95% successful delivery rate. In a country with such a fragmented courier service, that's amazing!
Even more amazing is that and the company is looking to better its performance. Ambitiously, VIPShop's management has considered building its own logistics service.
In a country that lacks brick-and-mortar discount stores, VIPShop likes to call itself the online equivalent of T.J. Maxx. Meaning, VIShop thinks that customers will flock to its service after running into difficulties finding VIPShop's partner brands elsewhere.
Wait, e-commerce flash sites have terrible economics
At the same time, we can see that there is nothing particularly new about the business. In the U.S., e-tailers like VIPShop have been around for several years. For example, Groupon has entered the discount luxury space with its own, time-limited deals on home and lifestyle goods last year. So far, the move doesn't seem that profitable – Groupon is still down 73% over the past year on the heels of slowing, stagnant sales.
Moreover, Amazon has had "Gold Box" and "Lightning Deals" for years. And as you spend some time online, you may be surprised to find many similar Chinese competitors like Vancl and Tmall. So if VIPShop's service is undifferentiated, then why has the company's stock risen almost three-fold?
Three macroeconomic trends driving VIPShop's stock
First, China is a trillion-dollar opportunity, according to Boston Consulting Group and the China Daily. Today's affluent class is 120 million people strong, but is expected to grow to 280 million people in 2020. With annual disposable incomes of at least $20,000, and averaging $40,000, their buying power will constitute $3.1 trillion.
Second, the article notes:
...the affluent seek status and recognition. They want to exhibit their new socioeconomic position by buying brands that were once unaffordable. They often feel enormous social and peer pressure to "look good".
Third, China's affluent consumers are willing to pay for convenience. As China's affluent class has less time to shop, they are looking toward business-to-consumer websites like VIPShop to save time on premium products.
Of course, in the next year or so, VIPShop may run into trouble. As China decelerates from double-digit to single-digit GDP growth, even diversified search giant Baidu saw a pullback after its last quarterly report. Furthermore, the company expects to feel the full slowdown in the fourth quarter (it forecast $1.1 billion in sales, which would be its slowest growth since 2009). So if the news is as dire as Baidu expects, VIPShop may also see the slowdown drag on its future sales guidance and, ultimately, suffer a stock hit.
Is it time to buy VIPShop?
At the Fool, we know it's almost impossible to time the market. Instead, we think investors like yourself should focus on the long-term. And in that light, the macroeconomic trends look great for VIPShop... but they also look great for countless other e-tailers.
Just because VIPShop was China's "hottest," most profitable stock of 2012 doesn't mean that it's a slam-dunk investment for 2013. Before making a call, I'd like to see the company issue a few more 10-Qs and maybe even a 10-K (I'd especially like to tease out a trend of rising revenue). And, as an investor, you deserve to see those financials before risking your portfolio.
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