Baozun (NASDAQ:BZUN), the e-commerce services provider frequently dubbed the "Shopify of China," went public at $10 per share five years ago. The stock surged to the low $60s by the summer of 2018, but was subsequently cut in half on concerns about its slowing growth, the trade war, and the COVID-19 pandemic.

But did investors overreact to those headwinds and toss out a baby with the bathwater? Let's take a fresh look at Baozun's business model, its growth rates, and valuations to find out.

How does Baozun make money?

Baozun is a "one-stop shop" for companies that want to quickly establish an online presence in China. It offers digital storefronts, fulfillment services, IT services, marketing campaigns, customer service, and other tools.

Tiny parcels on a laptop keyboard.

Image source: Getty Images.

Baozun originally took on its merchants' inventories and fulfilled their orders with a "distribution based" model. However, it gradually shifted away from that capital-intensive model to an asset-light "non-distribution" model, which allowed vendors to directly sell and ship their products to customers. Baozun's non-distribution GMV (gross merchandise volume) accounted for 92% of its total GMV last quarter.

Unlike Shopify, which generates most of its revenue from small to medium-sized businesses, Baozun mainly serves large companies like Starbucks and Nike. Its total number of brand partners grew 25% annually to 231 last quarter.

But like Shopify, Baozun is trying to boost its revenue per customer and lock them in with new merchant services. Baozun's services revenue accounted for 53% of its top line last year, while the remaining 47% came from product sales. Its "take rate", the percentage of the non-distribution GMV it retains as service revenue, also gradually rose in recent years as it pivoted from sales of lower-margin products to higher-margin ones.

Baozun doesn't face any meaningful competitors in its niche market. Alibaba and JD.com were once considered potential rivals, but both leading e-commerce players eventually integrated Baozun's services into their marketplaces.

How fast is Baozun growing?

Baozun's revenue growth has remained robust over the past five years, but its non-GAAP earnings growth has been volatile:

Growth (YOY)

2015

2016

2017

2018

2019

Revenue

64%

31%

22%

30%

35%

Net Income*

90%

437%

121%

30%

3%

Source: Baozun annual reports. YOY = Year-over-year. *Non-GAAP.

Baozun's profitability improved significantly after it pivoted from a distribution-based to a non-distribution based model, but those tailwinds have waned over the past two years.

Meanwhile, its operating expenses continued rising, due to fulfillment expenses for its distribution-based customers, the costs of acquiring new customers, higher marketing expenses, and the development of new services. As a result, its non-GAAP operating margin contracted 170 basis points annually to 6.3% in 2019.

Baozun's 2019 numbers didn't include the impact of the COVID-19 pandemic, which resulted in widespread lockdowns in February. For the first quarter, which bears the full brunt of the pandemic, Baozun expects its revenue to rise 9%-13% annually.

That forecast is encouraging, but Baozun expects its margins to contract further, and it declined to provide a full-year outlook. Analysts expect Baozun's revenue and earnings to rise 23% and 47%, respectively, this year, but investors should take those rosy forecasts with a bucket of salt.

Is Baozun cheap relative to its growth?

Baozun's stock currently trades at 26 times forward earnings, which seems cheap relative to Wall Street's forecasts. However, it could struggle to hit those lofty targets as the COVID-19 crisis throttles its revenue and margins.

Nonetheless, Baozun remains a good long-term play for investors who want exposure to China's growing e-commerce market but want to avoid the cutthroat competition between Alibaba, JD.com, Pinduoduo, and other marketplaces. Therefore, investors who ride out Baozun's near-term volatility might be well rewarded after the Chinese economy stabilizes and big brands accelerate their digital spending in China again.