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Baozun Is Getting Too Cheap to Ignore

By Leo Sun – Aug 22, 2019 at 3:11PM

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This Chinese e-commerce services provider still has plenty of room to run.

Shares of Baozun (BZUN 0.48%) tumbled Wednesday after the Chinese e-commerce service provider posted its second-quarter numbers. That post-earnings drop was surprising since Baozun easily beat expectations on the top and bottom lines.

Baozun's revenue rose 47% annually to RMB 1.7 billion ($248.2 million), beating estimates by nearly $24 million. Its adjusted net income climbed 46% to RMB 84.2 million ($12.3 million), or $0.21 per ADS, which beat expectations by two cents.

Baozun expects its third-quarter revenue to rise 35%-40% annually, but it didn't provide any bottom-line guidance. Analysts expect its earnings to rise more than 60%. Those are incredibly high growth rates for a stock that trades at just 22 times forward earnings.

Tiny parcels on top of a laptop keyboard.

Image source: Getty Images.

Let's take a closer look at why Baozun's stock tumbled after its earnings report, why its decline was unjustified, and why the stock is simply too cheap to ignore.

What does Baozun do?

Baozun helps companies quickly establish an e-commerce presence with digital storefronts, fulfillment services, IT services, marketing campaigns, customer service, and other services. Baozun doesn't have any meaningful competitors, which makes it a major beneficiary of the e-commerce boom in China. Alibaba (BABA -1.32%) was once considered a potential rival, but the e-commerce giant now integrates Baozun's services into its online marketplaces.

In the past, Baozun took on its merchants' inventories with a "distribution based" model. However, it gradually shifted away from that capital-intensive model and let vendors directly sell their products to customers via an asset-light "non-distribution based" model.

During the second quarter, Baozun's non-distribution based gross merchandise volume (GMV) accounted for 90% of its total GMV, or the total value of all goods sold across its online platforms. Its total GMV surged 60% to RMB 9.73 billion ($1.37 billion).

A courier delivers a package.

Image source: Getty Images.

Why did Baozun's stock drop?

Baozun's stock fell after its earnings report for four main reasons.

First, it initially stated that its GMV would rise 40%-45% annually during the third quarter and 40%-50% for the full year, which matched its prior outlook. However, it warned that that forecast didn't include the impact of a recent decision to transition one of its electronics GMV brands into a non-GMV partner, which would reduce its GMV growth by an uncertain amount. Baozun stated that the move would improve its margins, but that lack of clarity cast a shadow over its robust second-quarter results.

Second, Baozun's adjusted operating margin dipped 70 basis points annually to 6.1% as the company ramped up its tech investments. However, Lu noted that Baozun's operating margins would improve over "the next year" as it pivoted away from the aforementioned electronics brand.

Third, Baozun's take rate (the percentage of revenue it retains from each transaction) came in at 9.7%, which was up 30 basis points sequentially but down 100 basis points annually. But once again, CFO Robin Lu stated that Baozun's take rate would see a "gradual improvement" as it transitions away from lower-margin merchants and locks in higher-margin ones.

Lastly, the ongoing U.S.-China trade war, the slowdown in China's economy, and the depreciation of the yuan are causing many investors to either shun or sell lesser-known Chinese stocks like Baozun.

Why investors should ignore the noise and buy Baozun

Baozun's flaws are minor, and China's e-commerce market remains robust. Alibaba's core commerce revenue surged 44% annually last quarter, while its top rival JD.com's (JD -1.27%) revenue jumped 23%.

Alibaba reported broad-based demand across most of its product categories, while JD's growth was boosted by robust sales of big-ticket consumer electronics and home appliances. Those numbers indicate that China's e-commerce market is still booming and that Baozun still has plenty of room to run. Baozun's stock will likely remain volatile until the macro situation improves, but investors who buy these dips could be well-rewarded over the long term.

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

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Stocks Mentioned

Baozun Stock Quote
Baozun
BZUN
$6.28 (0.48%) $0.03
JD.com, Inc. Stock Quote
JD.com, Inc.
JD
$52.66 (-1.27%) $0.68
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$77.87 (-1.32%) $-1.04

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