Please ensure Javascript is enabled for purposes of website accessibility

Is Baozun Stock A Buy?

By Nicholas Rossolillo - Aug 26, 2020 at 9:37AM

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

China's digital economy is stronger than ever, and this small company has a lot to gain.

China is the largest digital commerce economy in the world and, according to researcher eMarketer, is on pace to pass the U.S. as the largest retail market outright in 2020. Though dominated by names like Alibaba (BABA 2.64%), e-commerce is still very much a growth industry on the other side of the Pacific. Alibaba-backed e-commerce infrastructure outfit Boazun (BZUN 5.42%) -- with a market cap of just shy of $2.6 billion -- is thus worth some attention.

Doubling down on the importance of digital selling

While the Chinese consumer is certainly reeling this year amid the COVID-19 pandemic, e-commerce is helping many manage their purchasing amid social distancing orders. Some method of digital purchase will account for about 40% of total retail sales in China in 2020, an increase of 16% from 2019 (again according to eMarketer). Not a bad figure considering the type of year this is shaping up to be. 

That is showing up in Baozun's results. Building on its 35% year-over-year revenue advance in 2019, Q1 2020 revenue increased 18%, and Q2 accelerated to 26% (to 2.15 billion Chinese renminbi, or $305 million). As of the end of June, brands utilizing Baozun's online store management, marketing, and/or order fulfillment services increased to 250, compared with 239 at the end of March and 212 at the end of June 2019.

A small shopping cart full of boxes sitting on top of a computer.

Image source: Getty Images.

Clearly Baozun is getting some benefit from the continual shift to online consumer activity, even though effects from the pandemic have slowed its trajectory a bit. And is it expands, net income has been rebounding since a warehouse fire in autumn 2019 and a switch to non-distribution sales, in which its partner brands ship merchandise directly to customers. Adjusted net income grew 73% in Q2 to 146 million renminbi ($20.7 million). 

But therein is a reason many investors may shy away from Baozun: With the company slowing down for now (its Q3 2020 forecast called for 16% to 20% year-over-year growth), shares currently trade for 57 times trailing 12-month earnings. It's a steep price tag that assumes the bottom-line will keep expanding at a high rate like it has been so far this year, and it's unclear if the company can sustain its recent pace. 

A developing middle class that wants world-class brand access

Add to that the fact that Baozun is far from having e-commerce management services cornered in the Middle Kingdom. It's going up against plenty of other services in China's massive and well-developed digital ecosystem -- although counting Alibaba as a key shareholder and integrating with Alibaba's Tmall online marketplace are working in its benefit. There's also political risk, as Baozun and other Chinese stocks face a possible delisting from American stock exchanges

Substantive risks considered, though, this is a small stock worth keeping on your radar. Baozun focuses its partnership on large companies outside of China looking to tap the developing Chinese middle class -- names that include Nike, Nintendo, Burger King (owned by Restaurant Brands International), and Michelin, to name just a few. And even in the midst of a global economic downturn, Baozun continues to steadily add new brands to its stable. The pairing of new customers and rising Chinese consumerism can be a powerful combo over time. 

That said, my standard rule for investing in small-cap stocks applies here. I usually make an initial investment of less than 1% of my portfolio value and add to the winners over time. As it's a small player in China's retail universe with ample and deep-pocketed competitors, my position in this company is small, and is part of a larger collection of other small-cap stocks. Nevertheless, Baozun has the makings of a long-term winner, even though COVID-19 is hurting the near-term outlook.

Nicholas Rossolillo owns shares of Alibaba Group Holding Ltd. and Baozun. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Baozun, and Nike. The Motley Fool recommends Nintendo and Restaurant Brands International Inc. The Motley Fool has a disclosure policy.

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

Baozun Stock Quote
$9.14 (5.42%) $0.47
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
$94.87 (2.64%) $2.44

*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 analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

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.