When it comes to investing, knowing when to buy, sell, or hold a stock can mean the difference between making money and losing it in the market. However, making the best decisions for your investments can be challenging. Fortunately, investors can minimize risk by weighing both the pros and cons of a given stock before deciding how to act. Today, we'll take a closer look at E-Commerce China Dangdang (NYSE:DANG) and evaluate whether investors should buy, sell, or hold this Chinese e-commerce stock.
If you're like me, then you're always looking for the next big growth stock. Where better to find such a stock than the world's second-largest economy: China? Often referred to as the "Amazon of China," Dangdang got its start as a Chinese online bookstore. However, today the company sells more than just books, including electronics, apparel, and accessories.
Similar to Amazon.com (NASDAQ:AMZN) in the United States, Dangdang's Web marketplace allows third-party vendors to sell items on its site. Another company to successfully master this model is Web auction powerhouse eBay (NASDAQ:EBAY). In fact, eBay is planning to reenter the Chinese market after its first attempt in 2004 failed. The auction site's initial push into the Asian country ended badly for eBay after Alibaba launched a free auction website in China named Taobao, or "digging for treasure."
Today, Alibaba's Taobao is big competition not only for eBay, but also for Dangdang.
To get an idea of just how important the Chinese market is, consider this: China is on track to become the world's biggest online marketplace, with e-commerce sales expected to triple in the next three years to around $420 billion by 2015. With projections like that, how could online retailers like Dangdang not succeed, right?
Not so fast. Let's dive into the hidden risks, and examine why investors might be better off selling this foreign e-commerce stock.
The e-commerce giant's position within the Chinese market is both a positive and a negative for Dangdang. On the downside, many analysts worry that slowing economic growth in China will negatively impact businesses like Dangdang, which rely heavily on consumer spending. Increased competition in the Chinese market is another serious problem facing the company.
Perhaps it's a bit inaccurate to consider Dangdang the Amazon.com of China because, well, Amazon China (formally Joyo Amazon) already fits the bill. That's right, the world's largest online retailer has been up and running in China since 2004. That's because the Asian market is key for global online retailers like Amazon and eBay. According to research from Boston Consulting Group, "China currently has 193 million online shoppers -- more than even the U.S. with 170 million."
This means that if Dangdang wants to have a fighting chance, it needs to increase its share of the Chinese e-commerce market. At the end of last year, Alibaba-owned Tmall.com dominated with nearly 40% of the market, followed by 360buy.com at 14%. Amazon China was further down the list, with a 2.2% share, and behind it Dangdang mustered a weak 1.6% slice of the market.
Adding insult to injury, the company's income statement reveals that annual net income slid from positive territory in fiscal 2010 to a net loss of more than $36,000 last year. That's reason enough to sound the alarms. But it gets worse. The stock is down more than 43% in the second half of this year, as slowing growth and a drop in active customers has scared away many investors.
But before we give up all hope in Dangdang, let's investigate why it may be worth holding on to for a bit longer.
Investors who are on the fence about this stock would be wise to wait until Thursday, Nov. 15, when the company reports its third-quarter earnings. Other Chinese companies with U.S.-based counterparts such as Baidu (NASDAQ:BIDU), or the Google of China , showed surprising strength when reporting earnings last month. The Chinese search giant posted third-quarter earnings per share of $1.37, which was ahead of analysts' estimates for $1.28.
While it's true that Dangdang and Baidu are both Chinese Internet stocks, the comparison is not without faults. Baidu controls nearly 80% of online search in the China, whereas Dangdang struggles to maintain a near 2% hold on its Web segment. If Dangdang wants to make it back into investors' portfolios, it needs to prove that it's capable of winning back market share from competitors.
At this point, I'm not so sure that's the case. Between slowing growth in China's economy and increased competition in the e-commerce space, I'm not confident that Dangdang can fully recover. Not to mention, there are plenty of less risky ways to play the Chinese Internet boom. For some ideas, I encourage you to check out our new in-depth research report on Baidu.
Fool contributor Tamara Rutter owns shares of Amazon.com. Follow her on Twitter, where she uses the handle: @TamaraRutter for more Foolish insights and investing ideas. The Motley Fool owns shares of Amazon.com, Baidu, and Google. Motley Fool newsletter services recommend Amazon.com, Baidu, eBay, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.