Shares of Baozun (BZUN 1.28%) plunged about 20% on Nov. 12 after the Chinese e-commerce services provider released its growth figures for Singles Day (Nov. 11), China's equivalent of Black Friday. Baozun's numbers initially seemed impressive: Total orders settled through payment gateways on its e-commerce channels rose 31% annually to a record high of 6.55 billion RMB ($940 million). Unfortunately, that also represented a deceleration from 2016 and 2017, when its orders roughly doubled each year.
Baozun's slowdown also seemed steep compared to the growth of e-commerce market leader Alibaba's (BABA 0.09%) Singles Day results. Alibaba reported 27% growth in GMV (gross merchandise volume) on a RMB basis this year, which represented a more moderate deceleration from its 39% growth last year.
Image source: Getty Images.
Baozun's numbers also suggest that its core customer base, which contains a mix of small to medium businesses and multinational companies, struggled to gain shoppers even as megamarketplaces like Alibaba's Tmall and JD.com dominated Singles Day. Investors were also probably looking for reasons to take profits in Chinese tech stocks like Baozun, which are being squeezed by trade tensions and a weak RMB. But did investors overreact?
Understanding Baozun's business
Baozun isn't an online marketplace like Tmall or JD. It's a one-stop shop for businesses that want to bring their offline businesses online with digital storefronts, marketing solutions, customer relationship management services, IT services, fulfillment services, payment services, and other features.
This strategy, which is similar to Shopify's, allows Baozun to profit from the growth of China's e-commerce market without launching a massive marketplace. It's a popular, scalable approach that helped the company grow its number of brand partners by 16% annually during the second quarter.
Baozun previously took possession of the goods sold on its platform with a distribution-based business model. But over the past several quarters, it pivoted toward a non-distribution based business model which lets vendors directly sell their products to consumers.
Image source: Getty Images.
Baozun's total GMV rose 69% annually to 6.08 billion RMB ($880 million) last quarter. Within that total, its distribution-based GMV rose 14% to 666 million RMB, but its non-distribution GMV soared 80% to 5.42 billion RMB.
That strategy helps Baozun expand its operating margin (which rose 80 basis points to 5% last quarter), and is reflected in the split between its products and services revenues. Last quarter, Baozun's products revenue rose 14% annually to 577 million RMB ($87.2 million) as its services revenue jumped 52% to 582 million RMB ($88 million).
Evaluating Baozun's growth
Baozun's revenue and net income growth have remained robust over the past year.
|
Q3 2017 |
Q4 2017 |
Q1 2018 |
Q2 2018 |
|
|---|---|---|---|---|
|
Revenue |
19% |
23% |
15% |
31% |
|
Net income* |
25% |
128% |
11% |
34% |
YOY growth in RMB terms. *Non-GAAP. Source: Baozun quarterly reports.
For its third quarter earnings, which will be reported on Nov. 20, analysts expect Baozun's revenue and earnings to rise 24% and 22%, respectively, in USD terms. For the full year, they expect its revenue to rise 31% and for its earnings to grow 58%. Those are massive growth rates for a stock that trades at 19 times forward earnings.
The bears likely think that Baozun's decelerating Singles Day growth indicates that it will miss revenue estimates for its fourth quarter, which ends on Dec. 31. They might also argue that Alibaba's expanding ecosystem could render Baozun obsolete.
However, Baozun couldn't be expected to double its Singles Day orders every year, and its 31% growth still outpaced Alibaba's GMV growth this year. As for Alibaba, it actually owns a big stake in Baozun, and integrates its services into its marketplace -- so it won't become a competitor.
The road ahead
Baozun's stock will likely remain under pressure unless the US and China make some progress in their trade negotiations, but I still think it's a solid long-term play on China's e-commerce market. So instead of panicking about Singles Day, investors should wait for Baozun's third quarter report and guidance before jumping to conclusions.
