Shares of Secoo (NASDAQ:SECO) tumbled 9% on Sept. 6 after the Chinese e-commerce company posted its second quarter results. Its revenue rose 56% annually to 1.22 billion RMB ($184.4 million), beating estimates by over $20 million.

Secoo's non-GAAP net income rose 42% to 41 million RMB ($6.2 million), or $0.12 per ADS, which missed estimates by two cents. Its GAAP net income grew 26% to 36.4 million RMB ($5.5 million), or $0.10 per ADS.

A woman carries shopping bags.

Image source: Getty Images.

Secoo's bottom line miss was disappointing, but its growth still looks stunning for a stock that trades at 16 times this year's earnings and 0.8 times this year's sales. The stock also remains below its IPO price of $13.

What does Secoo do?

Secoo claims that it's "Asia's largest online integrated upscale products and services platform," based on a Frost & Sullivan study that claims that the company controls 25% of China's online market for luxury goods.

However, that figure is questionable; Secoo's GMV (gross merchandise volume), or the value of all the goods sold across its platform, only came in at 1.65 billion RMB ($250 million) last quarter.

JD.com (NASDAQ:JD), for comparison, reported 473.4 billion RMB ($64 billion) in GMV last quarter. JD.com doesn't disclose exactly how much of its GMV comes from luxury goods, but it also sells luxury goods on its main marketplace and its Toplife platform.

Secoo's active customer count of 255,500 is also much tinier than JD.com's active customer base of 313.8 million. But in its F-1 filing, Secoo emphasized that it had over 15 million registered users. Secoo never explained why there was such a gap between its "registered" users and its "active" users who made a least one purchase per quarter -- and it simply removed the registered user count from subsequent reports.

Therefore, it seems like Frost & Sullivan's study was based on cherry-picked data points aimed at making Secoo seem more impressive ahead of its public debut last September.

A shopper views a purse on a shopping app.

Image source: Getty Images.

How fast is Secoo growing?

Secoo's year-over-year growth looks impressive, but that's often the case for younger companies.

 

QoQ change

YOY change

GMV

48%

45%

Active customers

59%

98%

Revenue

52%

56%

Source: Secoo Q2 earnings report.

Secoo's customer growth outpaced its GMV and revenue growth, indicating that it was attracting more customers but generating less revenue per shopper. To make matters worse, Secoo expects its revenue to rise just 36%-40% annually and 10%-12% sequentially during the third quarter. This strongly indicates that its growth could peak next year.

Secoo's sales growth is decelerating, but its spending isn't. Its operating expenses rose 64% annually and 54% sequentially to 167.1 million ($25.3 million) and outpaced its revenue growth.

That gave Secoo a slim operating margin of 4.6%, compared to 3.5% a year earlier. But if Secoo's sales growth decelerates as it boosts its spending, its earnings growth will grind to a halt. That will likely happen, since Secoo is aggressively expanding its ecosystem with investments in brick-and-mortar storefronts, a fledgling internet advertising business, and even a blockchain platform for authenticating luxury goods.

Cash, trust, and management issues

Secoo made its public debut just as it was about to run out of cash, but it's still burning through a lot of cash.

 

Q3 2017

Q4 2017

Q1 2018

Q2 2018

RMB

1.04 billion

924.8 million

566.3 million

444.2 million

USD

$156.5 million

$142.1 million

$90.3 million

$67.1 million

Cash and equivalents by quarter. Source: Secoo quarterly reports.

At this rate, Secoo could need to raise more cash through a secondary offering or take on debt to stay afloat. Moreover, Secoo's COO Eric Chan recently resigned "to pursue other opportunities," and the company didn't provide any additional details on its conference call.

Secoo also oversells its ties with Tencent (NASDAQOTH:TCEHY) and JD. It shares some shopping data with Tencent's WeChat and displays ads on the platform, but that doesn't make them major partners. Secoo noted that JD bought some of its convertible notes, but that also doesn't mean that JD is no longer its top competitor.

It's a matter of trust... and I don't trust Secoo

I previously owned some of Secoo's IPO shares, but I sold my entire stake after the blockchain news briefly lifted the stock above its IPO price. Secoo might look like an undervalued growth stock, but I simply don't trust this company enough to buy any shares again.

Leo Sun owns shares of JD.com and Tencent Holdings. The Motley Fool owns shares of and recommends JD.com and Tencent Holdings. The Motley Fool has a disclosure policy.