Shares of Baozun (BZUN -6.69%) recently rebounded sharply after the Chinese e-commerce service provider's third-quarter earnings beat analyst expectations. Revenue rose 25% annually to 1.11 billion RMB ($161.7 million), beating estimates by less than $1 million.

Non-GAAP net income grew 47% to 51.4 million RMB ($7.5 million), or $0.13 per ADS, which topped expectations by $0.03. On a GAAP basis, its net income went up 36% to 29.8 million RMB ($4.3 million).

A sign at Baozun's office.

Image source: Baozun.

For the fourth quarter, Baozun expects its revenue to climb 41%-44% annually in RMB terms, which would mark its strongest growth in three years. Baozun attributes that acceleration to strong sales during Singles Day (Nov. 11) this year. Let's dig deeper into Baozun's report to see why its stock could be a compelling buy.

1. A well-balanced business model

Baozun doesn't own a major online marketplace like Alibaba's (BABA -4.76%) Tmall or (JD -5.93%). Instead, it helps businesses establish an e-commerce presence in China by bundling together digital storefronts, marketing platforms, logistics services, IT services, customer relationship management tools, and other services.

Bears have claimed that companies like Alibaba could simply launch a similar platform to cut Baozun out of the loop. However, Alibaba is actually one of Baozun's top investors, and it integrates its services into Tmall and Taobao.

This makes Baozun's platform the leading "one-stop shop" for digitizing small, medium, and large businesses in China. During the third quarter, Baozun's number of brand partners -- which already include heavyweights like Nike and Starbucks -- rose 18% annually to 172.

2. A shift toward higher-margin revenue

Baozun's GMV (gross merchandise volume), or the value of all goods sold across its platform, surged 55% annually to 6.36 billion RMB ($920 million) during the quarter. In the past, Baozun took possession of the goods sold across its platform with a "distribution-based" model. But over the past few quarters, it let more vendors directly sell their products to customers via a "non-distribution based" model.

A mini-shopping cart filled with parcels on top of a laptop keyboard.

Image source: Getty Images.

This change helps Baozun expand its margins as it grows its customer base. During the quarter, its non-distribution based GMV surged 62% annually to 5.78 billion RMB, while its distribution-based GMV rose just 6% to 581 million RMB.

That shift is reflected in its rising higher-margin services revenue. Its service revenue grew 45% annually during the quarter and accounted for 55% of its top line, compared to 47% in the prior-year quarter. That ongoing shift boosted Baozun's non-GAAP operating margin 90 basis points annually to 5.5%. Its GAAP operating margin also expanded 40 basis points to 3.5%.

Baozun expects its year-over-year services revenue growth to exceed its estimated GMV growth of 40%-45% during the fourth quarter. This indicates that its margins will continue to expand as it pivots away from distribution-based GMV.

3. Double-digit growth at reasonable valuations

Baozun is generating steadier top- and bottom-line growth than e-commerce marketplace leaders like Alibaba or JD because it doesn't face any meaningful competition. Its diverse customer base, which consists of both domestic and overseas brand partners, also insulates it from tariffs and escalating trade tensions.

Metric Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018







Net income*






Year-over-year growth in RMB terms. *Non-GAAP. Data source: Baozun quarterly reports.

Analysts expect Baozun's revenue and earnings to rise 33% and 58%, respectively, next year. Those are incredible growth rates for a stock that trades at just 21 times forward earnings. By comparison, Alibaba and JD trade at 23 and 33 times forward earnings, respectively.

Time to buy the dip

Baozun's stock tumbled more than 40% over the past three months, and it could slide further if trade tensions escalate, the RMB depreciates against the dollar, or rising interest rates push investors out of growth stocks. However, I think investors who start a position here -- then accumulate more shares on bigger dips -- could be well rewarded over the long term.