Shares of Baozun (NASDAQ:BZUN) plunged 17% on Nov. 22 after the e-commerce solutions provider reported its third quarter earnings. That decline was surprising, since Baozun's headline numbers looked solid.
Its revenue rose 19% annually to 890.2 million yuan ($133.8 million), beating expectations by $1.65 million. Its non-GAAP net income grew 25% to 35.1 million yuan ($5.3 million), or 0.59 yuan ($0.09) per ADS, which also topped estimates by a penny.
So why did Baozun drop so much after that report? Let's dig deeper into the positive and negative points to find out.
What does Baozun do?
Baozun provides retailers with digital storefronts with bundled marketing, customer, fulfillment, and IT services -- making it a "one-stop shop" for digitizing a business. This makes it a smart play on the booming Chinese e-commerce market, which could grow from $750 billion in 2016 to $1.7 trillion by 2020, according to Goldman Sachs.
Baozun brings major brands like Starbucks and Nike to China, and holds partnerships with top e-commerce players Alibaba (NYSE:BABA) and JD.com (NASDAQ:JD). Alibaba is also one of Baozun's biggest investors.
First, the good news...
During the third quarter, Baozun's total number of brand partners rose 15% to 146. Its gross merchandise volume (GMV), or the value of all goods sold on the platform, rose 71% annually.
Baozun has been pivoting away from a distribution model, in which it takes ownership of the inventory that is sold, toward a non-distribution model, in which vendors sell goods directly to customers.
Baozun's non-distribution GMV rose 93% annually to 3.56 billion yuan ($540 million) during the quarter, while its distribution GMV dipped 2% to 546 million yuan ($83 million). That shift lifted its service revenues, which accounted for nearly half of its top line, by 55% annually.
Its non-GAAP operating margin expanded 50 basis points annually to 4.6%, while its GAAP operating margin rose 10 basis points to 3.1%. That improvement was impressive, since Baozun's total operating expenses jumped 19% annually due to higher investments in the expansion of its Shopdog platform with new cloud, analytics, and IT services.
Baozun's guidance for 17%-20% sales growth for the fourth quarter also compared favorably to analyst expectations for 17% growth. For the full year, analysts expect Baozun's revenue and non-GAAP earnings to respectively rise 22% and 106%.
Now the bad news...
Those numbers look solid, but Baozun's 19% sales growth in the third quarter also marks its slowest growth rate since its IPO in 2015. As its top line growth decelerates and its operating expenses rise, its earnings growth could also fade.
Baozun's cash burn rate is also troubling. Its cash and equivalents dropped from 917 million yuan ($139 million) at the end of 2016 to just 148 million yuan ($22 million) last quarter, mostly due to investments in new features and its cloud ecosystem.
Baozun's stock also remains richly valued after rallying 145% this year. Its trailing P/E of 91 is almost double the industry average of 46 for specialty retailers. So the stock was priced for perfection, but Baozun disappointed investors with its decelerating sales growth, dwindling cash flows, and high valuations.
Should you buy Baozun after this dip?
I believe that Baozun is a "best in breed" player that controls a growing niche market in the crowded Chinese e-commerce space. I also believe that with the support of major brands and marketplaces like Alibaba and JD.com, Baozun will remain the first stop for offline retailers looking to build an online presence.
But I'm also concerned about Baozun's slowing revenue growth amid much higher sales growth figures from Alibaba and JD.com over the past few quarters. This indicates that more sellers might be directly setting up shop on Alibaba's Tmall or JD.com, or opening up their own direct-to-consumer channels, without Baozun's help.
I think Baozun still a good speculative play, since its growth could accelerate again after its cloud investments pay off, but more risk-averse investors should probably stick with well-established e-commerce leaders like Alibaba instead.