Many discussions about Chinese e-commerce stocks seem to focus on three names: Alibaba (BABA 0.09%), JD.com (JD 1.23%), and Pinduoduo (PDD 0.24%). That isn't surprising since they're the three largest players: Alibaba controlled 56% of the market last year, according to eMarketer, followed by JD's 17% share and Pinduoduo's 7% share.
However, fewer investors likely follow Vipshop (VIPS -1.17%), the flash sale platform that ranks a distant sixth with a 1% market share. Yet this oft-overlooked stock rallied a whopping 180% over the past 12 months, as shares of Alibaba and JD rose roughly 50% and 100%, respectively.
Let's see why Vipshop is often overlooked, why it outperformed its larger peers, and whether or not it's still worth buying after its massive gains.
Image source: Getty Images.
Why aren't more investors talking about Vipshop?
Vipshop launched one of China's first online flash sale marketplaces in 2008. It went public in 2012 at $6.50 per share, well below its expected range of $8.50-$10.50, presumably due to concerns regarding its widening losses and competition from Alibaba and JD.
Nonetheless, Vipshop's stock hit an all-time high of about $30 a share in early 2015 as it won over the bulls with its robust growth. But Vipshop gave up those gains over the following years, sinking below $5 per share in late 2018 as its growth decelerated and Alibaba launched similar flash sales for its Taobao and Tmall marketplaces. That's when many investors gave up on Vipshop.
However, two major investors -- JD and Tencent (TCEHY 1.91%) -- bought major stakes in Vipshop in late 2017. Tencent already owned a major stake in JD and integrated its marketplace into WeChat, the top messaging platform in China with over 1.2 billion monthly active users. Tencent did the same for Vipshop, and JD integrated Vipshop's flash sales into its own marketplace -- thus eliminating the barriers between the three companies.
That partnership delivered a steady stream of new customers to Vipshop, eliminated the threat of competition from JD, and shored up its defenses against Alibaba. By the end of 2019, over a fifth of Vipshop's new customers were coming from Tencent and JD's platforms.
A robust recovery ... and a temporary slowdown
Vipshop's business stabilized throughout 2019, as its double-digit growth in customers and orders generated accelerating year-over-year revenue growth. However, the COVID-19 crisis caused its momentum to fizzle out again in the first quarter of 2020.
|
Growth (YOY) |
Q1 2019 |
Q2 2019 |
Q3 2019 |
Q4 2019 |
Q1 2020 |
|---|---|---|---|---|---|
|
Active Customers |
14% |
11% |
21% |
19% |
0% |
|
Total Orders |
29% |
33% |
33% |
24% |
4% |
|
Revenue |
7% |
10% |
10% |
12% |
(12%) |
YOY = Year-over-year. Source: Vipshop quarterly earnings.
Likewise, Vipshop's gross margin -- which expanded throughout 2019 -- contracted annually and sequentially due to a higher mix of low-margin essential products. However, its operating margin still expanded annually as it tightened up its spending throughout the crisis.
|
Metric |
Q1 2019 |
Q4 2019 |
Q1 2020 |
|---|---|---|---|
|
Gross Margin |
20.4% |
23.9% |
19.2% |
|
Operating Margin* |
4.9% |
7.4% |
5.6% |
Source: Vipshop quarterly earnings. *Non-GAAP.
As a result, Vipshop's adjusted net income actually rose 21% annually during the first quarter.
Vipshop expects its second-quarter revenue to rise 0%-5% annually, indicating its business passed a trough during the first quarter. It didn't offer any longer-term guidance, but Wall Street expects its revenue to rise 4% this year as its earnings rise nearly nine-fold -- followed by 13% sales growth and 21% earnings growth next year.
Investors should take those forecasts with a pillar of salt, since the COVID-19 crisis, the ongoing U.S.-China trade war, and the threat to delist U.S.-listed Chinese stocks all remain potential headwinds. Nonetheless, Vipshop's forward P/E of 16 still looks cheap relative to its potential earnings growth.
Investors should be talking about Vipshop stock
Alibaba and JD are still solid long-term plays on China's e-commerce market, and Pinduoduo remains an interesting growth play for more speculative investors. But investors looking for a hidden gem should take a closer look at Vipshop -- which is backed by two tech giants, generates robust growth, and still trades at a ridiculously low valuation after its monstrous gains over the past year.
