Vipshop (VIPS 6.46%), one of the distant underdogs in China's crowded e-commerce market, lost about 70% of its market value this year. China's crackdown on its top tech companies spooked Vipshop's investors, and a disappointing earnings report in November exacerbated the pain.
But after that steep sell-off, Vipshop's stock trades at just six times forward earnings and about 0.3 times this year's sales. Those valuations are very low, suggesting the stock might be a bargain purchase. But four red flags suggest this stock will likely have trouble rebounding in 2022.
Image source: Getty Images.
1. Tencent's divestment from JD.com
Vipshop's flash sale marketplace controlled just 1% of China's e-commerce market this year, according to eMarketer. Just a few years ago, Vipshop seemed doomed to be overtaken by Alibaba's (BABA 4.76%) Taobao, Pinduoduo (PDD 3.17%), and other discount marketplaces.
But in late 2017, JD.com (JD 3.55%) and Tencent (TCEHY 2.37%) -- which have a close relationship and both considered Alibaba to be a common rival -- co-invested in Vipshop and integrated its flash sales into their own ecosystems. By the end of 2019, more than a fifth of Vipshop's new users were coming from JD and Tencent's platforms.
Those partnerships arguably saved Vipshop from being rendered obsolete. However, Tencent recently announced it would reduce its stake in JD from about 17% to 2.3% to appease China's antitrust regulators. That divestment could weaken the symbiotic relationship between Tencent and JD, and it suggests that Tencent could also eventually reduce its stake in Vipshop.
Weakening the bonds between these three allies will also likely weaken Vipshop's defenses against its competitors.
2. Decelerating growth in customers and orders
The closer scrutiny of Tencent and JD's alliance comes at a bad time for Vipshop. Last quarter, its number of active customers and total orders declined sequentially and slowed to a crawl on a year-over-year basis:
|
Period |
Q3 2020 |
Q4 2020 |
Q1 2021 |
Q2 2021 |
Q3 2021 |
|---|---|---|---|---|---|
|
Active Customers |
43.4 million |
53.0 million |
45.8 million |
51.1 million |
43.9 million |
|
Growth (YOY) |
36% |
37% |
54% |
32% |
1% |
|
Total Orders |
172.8 million |
227.3 million |
175.5 million |
221.5 million |
172.9 million |
|
Growth (YOY) |
35% |
30% |
44% |
30% |
0% |
Source: Vipshop. YOY = Year over year.
During the latest conference call, Vipshop's CEO Eric Shen attributed that slowdown to "macro headwinds and the general weakness in the retail industry." It also focused more on expanding its Amazon Prime-like "Super VIP" membership plans instead of courting new shoppers with aggressive discounts.
Its total number of Super VIP subscribers rose 40% year over year and accounted for a third of its gross merchandise volume (GMV), but that still represented a slowdown from its 50% growth in the second quarter.
3. Decelerating growth with contracting margins
Investors might assume that focusing on higher-value Super VIP members would boost Vipshop's average revenue per user and margins. However, Vipshop's revenue growth actually decelerated significantly over the past two quarters as its gross and operating margins declined:
|
Period |
Q3 2020 |
Q4 2020 |
Q1 2021 |
Q2 2021 |
Q3 2021 |
|---|---|---|---|---|---|
|
Revenue Growth (YOY) |
18% |
22% |
51% |
23% |
7% |
|
Gross Margin |
21.1% |
21.9% |
19.7% |
20.1% |
19.4% |
|
Operating Margin |
5.4% |
7.2% |
5.3% |
5% |
3.1% |
Source: Vipshop. YOY = Year over year.
Vipshop is also growing at a much slower rate than Alibaba, JD, and Pinduoduo, which all generated double-digit percentage sales growth from their larger customer bases in their latest quarters.
Vipshop's margins are under pressure because it doesn't have a lot of pricing power and it's been offering promotional discounts for new Super VIP members. Therefore, the Super VIP program is still likely a loss-leading strategy instead of a margin-boosting one.
In November, Vipshop predicted its revenue would rise just 0%-5% year over year in the fourth quarter as a resurgence of COVID-19 cases and other macro headwinds disrupted its Singles Day sales. But on Dec. 27, it reduced that guidance to a year-over-year decline of 0%-5%.
4. Regulatory headwinds in China and the U.S.
Vipshop wasn't hit by an antitrust probe and a record fine like Alibaba, but it still faces unpredictable regulatory headwinds in China. In early 2021, China's State Administration for Market Regulation (SAMR) levied a 3 million yuan ($470,839) fine against Vipshop for its usage of customer data to influence user choices and selectively block sales of particular brands.
That fine is a slap on the wrist for a company that generated $15.6 billion in revenue last year, but it will likely prevent Vipshop from aggressively promoting its products with targeted listings in the future.
In the U.S., Vipshop -- like many other Chinese companies -- could also be delisted if doesn't comply with new auditing standards. All those regulatory challenges could prevent Vipshop's stock from recovering in 2022.
Stick with the market leaders
There aren't any compelling reasons to buy Vipshop right now, especially when Alibaba, JD, and Pinduoduo are also trading at historically low valuations. If you're still bullish on the long-term growth of China's e-commerce market, invest in one of those market leaders instead of this struggling underdog.
