Please ensure Javascript is enabled for purposes of website accessibility

Should You Buy This Chinese E-Commerce Stock at Its 52-Week High?

By Leo Sun - Mar 7, 2020 at 11:10AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Vipshop is firing on all cylinders -- but it’s still trading at a steep discount to its growth.

Vipshop's (VIPS 0.82%) stock recently surged to a 52-week high after the Chinese e-commerce company posted impressive fourth-quarter numbers. Its revenue rose 12% annually to 29.3 billion yuan ($4.2 billion), beating estimates by $220 million and marking its strongest growth in five quarters.

Its non-GAAP net income soared 111% to $1.9 billion yuan ($277 million), or $0.41 per ADS, which topped expectations by $0.10. On a GAAP basis, which includes stock-based compensation expenses and other one-time charges, its net income still rose 111% to 1.5 billion yuan ($209 million), or $0.31 per ADS.

Vipshop's earnings beat indicates that the e-commerce underdog, which eMarketer claims controlled just 1.2% of China's e-commerce market last year, is still thriving in a tough market battered by an economic slowdown and the novel coronavirus crisis. But does its stock still have room to run after more than doubling over the past 12 months?

Two female shoppers carrying shopping bags.

Image source: Getty Images.

A resilient e-commerce underdog

Vipshop was founded 12 years ago as one of the first flash sale marketplaces in China. It struggled after Alibaba (BABA -1.03%) launched flash sales on Taobao and Tmall, but two of Alibaba's rivals -- Tencent (TCEHY -1.38%) and JD.com (JD -1.16%) -- acquired major stakes in Vipshop in late 2017.

Tiny parcels on a laptop keyboard.

Image source: Getty Images.

Tencent integrated Vipshop into WeChat, the top mobile messaging platform in China with over 1.15 billion monthly active users. JD, the country's largest direct retailer, integrated Vipshop into its own marketplace. That support delivered a steady stream of shoppers to Vipshop: 22% of its new customers came from Tencent and JD's platforms during the fourth quarter, compared to 23% in the third quarter.

Vipshop's total number of active customers grew 19% annually to 38.6 million in the fourth quarter, and 14% to 69 million for the full year. During the conference call, CEO Eric Shen attributed that growth to "solid customer retention and improved customer stickiness." Shen also noted that its percentage of repeat customers grew from 76% in 2018 to 80% in 2019, fueled by robust and consistent demand for its discount apparel.

Its total orders rose 24% to 174.6 million in the fourth quarter, and 29% to 566.3 million for the full year. That marked a slight deceleration from its previous quarters, but its overall growth rates remained robust:

Year-over-year growth

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Active customers

13%

14%

11%

21%

19%

Total orders

35%

29%

33%

33%

24%

Revenue

8%

7%

10%

10%

12%

Source: Vipshop quarterly earnings.

Expanding margins ... at a discount marketplace?

Vipshop's gross and operating margins expanded sequentially and annually during the quarter, which is a remarkable achievement for a flash sale marketplace:

Metric

Q4 2010

Q3 2019

Q4 2019

Gross margin

20.6%

21.6%

23.9%

Operating margin*

4.3%

7%

7.4%

Source: Vipshop quarterly earnings. *Non-GAAP.

The company attributed its gross margin expansion to stronger sales of higher-margin apparel, which accounted for 70% of its gross merchandise volume during the quarter. Tighter control over its fulfillment expenses, which remained flat from a year earlier, and a 14% reduction to its marketing expenses lifted its operating margin.

By comparison, discount marketplace Pinduoduo (PDD -2.73%), which popularized bulk group purchases, posted a wider loss last quarter as it subsidized steep discounts for brand-name products.

But what about the coronavirus outbreak?

Vipshop expects its revenue to decline 15%-20% annually in the first quarter as the coronavirus outbreak throttles its apparel sales.

However, Shen noted that the company had already "seen some signs of recovery in March" and believes that demand "will rebound quickly once the virus is contained." Shen also reiterated Vipshop's "full confidence in the strength of Chinese economy and the long-term growth potential in China's discount retail market."

Investors should also recall that Vipshop often sandbags its guidance. It previously estimated that its revenue would only rise 0%-5% annually for the fourth quarter, which was well below its actual growth rate of 12%. Therefore, Vipshop's forecast is likely a cautious one, and it could report much stronger growth if the coronavirus crisis ends.

Should you buy Vipshop at its 52-week high?

Vipshop's stock had a tremendous run, but it still trades at less than one times this year's revenue and 10 times forward earnings.

Those valuations could rise if Vipshop's slowdown lasts for a few quarters, but it's still undeniably cheap compared to Alibaba and JD, which trade at 28 and 25 times forward earnings, respectively. Therefore, investors should accumulate shares of Vipshop at its 52-week high, since it could still go much higher over the long term.

 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Vipshop Holdings Limited Stock Quote
Vipshop Holdings Limited
VIPS
$8.64 (0.82%) $0.07
Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
TCEHY
$44.25 (-1.38%) $0.62
JD.com, Inc. Stock Quote
JD.com, Inc.
JD
$52.17 (-1.16%) $0.61
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$86.79 (-1.03%) $0.90
Pinduoduo Stock Quote
Pinduoduo
PDD
$40.90 (-2.73%) $-1.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
331%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.