Baozun's (NASDAQ:BZUN) stock recently surged after the Chinese e-commerce services provider posted its first-quarter numbers. Its revenue grew 18% annually to 1.52 billion yuan ($215.2 million), decelerating from previous quarters due to COVID-19 but beating estimates by $13.8 million.

Baozun's net income declined by 94% to 2.2 million yuan ($0.3 million). Its non-GAAP net income, which excludes stock-based compensation and other variable expenses, fell 51% to 26 million yuan ($3.7 million), or $0.06 per ADS -- which beat expectations by three cents.

Baozun expects its revenue to rise 20%-23% annually in the second quarter as the Chinese economy recovers from COVID-19, but it didn't offer any bottom-line guidance. Will Baozun's business recover and bring back more bulls?

A man makes online purchases on a computer.

Image source: Getty Images.

Unpacking Baozun's business

Baozun helps companies quickly establish their online presences in China with digital storefronts, fulfillment services, IT services, marketing campaigns, customer service, and other tools.

Unlike its Western counterpart Shopify (NYSE:SHOP), which mainly serves small- to medium-sized businesses, Baozun generates most of its revenue from multinational brands like Starbucks and Nike, and it integrates its services into Alibaba's (NYSE:BABA) online marketplaces and JD.com (NASDAQ:JD).

Baozun previously fulfilled merchants' orders with a distribution-based model. It gradually replaced that capital-intensive model with a higher-margin non-distribution model, in which merchants shipped their goods directly to consumers.

The non-distribution model generates revenue from consignment fees, which it charges for storing partners' products (but not logging them as inventory), and service fees for online support.

How fast is Baozun growing?

Baozun's total gross merchandise volume (GMV) rose 18% annually to 9.21 billion yuan ($1.3 billion) during the quarter. Its non-distribution GMV, which accounted for 91% of that total, grew 18% as its distribution-based GMV rose 10%. Its total number of brand partners grew 20% to 239.

E-commerce icons on a computer keyboard.

Image source: Getty Images.

Baozun's service revenue rose 23% thanks to higher consignment and service fees and accounted for 54% of its top line. The remaining 46%, which came from product revenue via its distribution-based model, rose 14%.

Baozun's blended gross margin expanded 80 basis points annually to 61.3%, as its higher-margin businesses grew faster than its lower-margin ones. However, its adjusted operating margin still contracted 260 basis points to 2.4%.

It attributed that contraction to increased promotions, sluggish spending from multinational brands, and a 44% spike in fulfillment expenses (due to higher logistics and consignment costs) throughout the COVID-19 crisis.

A brighter outlook with limited visibility

During the conference call, Baozun CFO Robin Lu said China's economy was recovering, and the company would "re-establish growth in our non-GAAP operating profit in the second quarter of 2020." Lu also expects Baozun's non-GAAP operating margin to improve for the full year.

Baozun's business could stabilize and rebound throughout the rest of 2020, and Alibaba and JD's latest reports indicate e-commerce demand remains robust across China. Wall Street expects Baozun's revenue and adjusted earnings to rise 25% and 51%, respectively, this year -- which are robust growth rates for a stock that trades at just 26 times forward earnings.

However, investors should take that bullish forecast with a grain of salt, since unresolved and unpredictable headwinds -- including a renewed trade war, a second wave of COVID-19 infections, and a threat to delist U.S.-listed Chinese stocks -- could pop that bullish bubble.

Is now the right time to buy Baozun's stock?

I recently called Baozun one of the top e-commerce stocks to buy now, and I stand by my assessment. The stock faces broader trade headwinds, but the potential long-term rewards arguably outweigh the near-term risks.

Baozun remains a great way to profit from China's e-commerce market without betting on a single horse like Alibaba or JD. It's pivoting toward a higher-margin business model, it faces few direct competitors, and its stock is cheap relative to its growth.