Why Baozun Stock Is a Buy for 2020

It's been rough going for Baozun (BZUN 3.69%) shareholders of late.

In the months since its stock hit all-time highs in the summer of 2018, the share price has declined in value by some 40%. An intensification in the U.S.-China trade war got the sell-off rolling. That was followed by slowing results in 2019. An announcement in Q3 that a large Chinese electronics company (assumed to be Huawei) had stopped using Bazoun's platform added to the pain. The run of bad news for the Chinese e-commerce logistics company was topped off in late October with a fire at a third-party warehouse that damaged a sizeable quantity of inventory: The losses to Baozun from the fire are now expected to run to $7.6 million.

There is still plenty to like about Baozun, though. E-commerce in China is a massive and fast-expanding industry, and investors who can stomach the wild swings that small stocks inevitably take would be remiss not to give this tech outfit a look in 2020.

BZUN data by YCharts

A review on numbers and expectations

China recently announced that its gross domestic product expanded by only 6.1% in 2019. That's the slowest growth rate for the country in nearly three decades. That has caused many investors to worry that a deceleration in the world's second-largest economy could cause trouble globally -- even though slowing growth is perfectly normal for a country as it develops. Besides, just as generally sluggish economic growth in the U.S. in the last decade has partially obscured the story of a massive boom in technology, so it has been in China with its own tech revolution. (Fast advances in tech cut into the overall economic growth rate because of the cost reductions and time efficiencies they unlock, but that's a discussion for another time.)  

Image source: Getty Images.

In fact, China is ahead of the U.S. in some areas, and e-commerce is one of them. Through the first half of 2019, the country's official data showed that online retail surged nearly 17% year-over-year to reach nearly 20% of total retail spending. That compares with 13% growth in e-commerce in the U.S. in 2019, which pushed it to 14% of total retail spending, according to the U.S. Census Bureau.

All of that is great news for Baozun, which provides everything from online store and marketing services to warehousing and order fulfillment for its retail partners in China. Companies have been in a mad dash to get their products on the internet over the last few years, and even as the trade war raged, Baozun's revenues climbed 30% in 2018 -- including a 41% increase in the fourth quarter. However, after spiking again at the onset of 2019, growth rates moderated as the year dragged on.  

Data source: Baozun. YOY = year over year.

Baozun's management also gave underwhelming guidance for Q4 2019, calling for year-over-year growth of 23% to 25%. Losses from the aforementioned warehouse fire will also likely mean a sluggish result on the bottom line. All of this contributed to the stock's most recent pullback.  

A high bar has been lowered

A few things have raised the odds that Baozun's share price will rebound, however. First, the possibility of a truce in the U.S.-China trade war could help reinvigorate the Chinese consumer. Notably, the popular Chinese retail holiday Singles Day on Nov. 11 was again big hit in 2019; sales reportedly surged by a double-digit percentage from 2018. For its part, Baozun said the value of orders on its platform was up 54% year over year on Singles Day, or 76% when excluding 2018 sales from that unnamed electronics provider that recently withdrew from the Baozun platform.

Plus, it's important to remember that Chinese retail sales are still increasing at a healthy mid-single-digit percentage pace as that nation's middle class expands, and the internet-based portion of those sales is growing at a mid-teen percentage rate. It's therefore reasonable to hope that Baozun will be able to regain its upward momentum. There could be some pressure on profitability in the short term due to the loss from the warehouse fire, but the stock currently trades at 25.2 times next year's expected earnings. That's a reasonable forward P/E ratio given the potential for this e-commerce technology provider. Baozun has an inconsistent track record when it comes to delivering on the bottom line, but that is to be expected for a small, fast-growing tech outfit. Management is all about maximizing revenue right now. Profits will come later.  

Baozun looks like a great way to bet on the continued advance of e-commerce in China, and shares look like a decent value given how much management is forecasting it will grow. With the stock still down in the dumps, it could be a timely portfolio addition for investors who are prepared to ride out the ups and downs.