Shares of Baozun (BZUN 0.81%) plunged 25% on Aug. 22, after the Chinese e-commerce services provider reported its second-quarter results. That decline was surprising, since Baozun beat analyst expectations on the top and bottom lines.
Baozun's revenue rose 27% annually to $131 million, beating estimates by $0.4 million and marking an acceleration from its 21% growth in the first quarter. Its non-GAAP net income rose 422% to $6.3 million, and its earnings per American depositary share rose from $0.02 to $0.11 -- topping expectations by a penny. On a GAAP basis, Baozun's net income jumped from $0.2 million to $4.4 million.
Image source: Getty Images.
Looking ahead, analysts expect Baozun's revenue and non-GAAP earnings to respectively grow 22% and 115% this year. Those figures all look bullish, so the stock's post-earnings crash seems irrational. Let's look at the bearish and bullish cases for Baozun, and why I think the bears are wrong about this stock.
Countering the bear case
Baozun, often called the "Shopify of China," is a one-stop shop that helps companies quickly establish an e-commerce presence. To do so, it provides digital storefronts, IT services, marketing campaigns, customer service, and various fulfillment services.
The bears often argue that after rallying 180% over the past 12 months, Baozun is overvalued. Granted, Baozun's trailing P/E of 89 looks high relative to the industry average of 47 for specialty retailers, but it's reasonable if it more than doubles its earnings this year. Its P/S ratio of 3 is also barely higher than the industry average of 2.5.
Another common argument is that Baozun's services could be rendered obsolete if e-commerce giants such as Alibaba (BABA 0.94%) launch their own storefront services for vendors. However, Alibaba is one of Baozun's biggest investors, and Baozun's services are already integrated into Alibaba's Taobao and Tmall ecosystems. That relationship mirrors Shopify's relationship with Amazon.com -- the bears initially thought Amazon would kill Shopify, but the two companies eventually teamed up.
Highlighting the bull case
Since Baozun is the go-to company for digitizing retailers, it's well poised to capitalize on the growth of the Chinese e-commerce market. China has an internet penetration rate of just 52%, compared with 89% in the U.S. and 91% in Japan. That leaves it plenty of room for future growth.
Baozun's gross merchandise volume, or the total value of products sold through its platform, rose 63.5% annually to 3.6 billion yuan ($542 million) last quarter. That represents an acceleration from 60.5% growth in the first quarter and 62.4% growth in the fourth quarter of 2016.
Its total number of brand partners rose 17% annually to 140. That list includes massive multinational companies such as Starbucks, Microsoft, Nike, and Coach. This indicates that Baozun should remain a gatekeeper for the Chinese e-commerce market for the foreseeable future.
To maintain that lead, Baozun opened an "innovation center" last quarter, which focuses on strengthening its IT, cloud-based operating platforms, analytics, and AI capabilities. Those investments, which will introduce more tools for Baozun's customers, should widen its moat against potential challengers.
Lastly, comparisons between Baozun and Shopify often miss the fact that the former is more profitable than the latter. Both companies went public in mid-2015. Baozun reported profits in every quarter since its debut, while Shopify struggled to do the same:
Data source: YCharts.
Should you buy Baozun today?
Baozun will probably remain a volatile stock, especially since its recent moves seem dictated by short-term traders instead of long-term investors. But I think investors who buy Baozun on these dips could be well rewarded over the long term -- it's a hidden gem in the red-hot Chinese tech market, and it should have more room to run than established giants like Alibaba.
