There's little doubt I'm bearish on E-Commerce China Dangdang (DANG +0.00%), the Chinese Internet retailer that fashions itself as the Amazon.com (AMZN 1.09%) of Asia. My last diatribe warning that the e-tailer was heading into danger was met with a chorus of vitriol for doubting its growth potential. Yet the stock, which was trading at more than $5 a share at the time, has since fallen to around $4 a stub, a 20% loss of value, and I don't think it is quite finished.
Getting mauled
Part of my bear thesis was that China's economy has subsisted on and benefited from government spending, enormous amounts that artificially inflate values and lull investors into thinking that higher stock prices mean good fundamentals. Although my Foolish colleague Jeremy Phillips made a good point: that, like Amazon, Dangdang is sacrificing profits to grow market share. I think that moment is quickly passing the e-commerce site by and will be unsustainable when the laws of economics return home to roost.
Already Wal-Mart (WMT 1.79%) is gaining ground on its adversary through Yihaodian.com, a business of which it owns more than half. The global discount retailer plans to expand its operations tenfold in the coming year.
Of course, Wal-Mart has achieved varying success in China over the years with its bricks-and-mortar format, but the partnership with the homegrown competitor to Dangdang could mean it gains real traction, as would a renewed push by Amazon as it prepares to offer the Kindle to Chinese consumers early next year. A tag-team duo like Wal-Mart and Amazon could see Dangdang's meager advantages evaporate, not to mention local competition like 360buy and Suning.
State of confusion
Yet China's economy remains the biggest worry. China is on track to become the world's biggest online marketplace, with e-commerce sales tripling over the next three years to around $420 billion by 2015 if analyst guesses pan out. While some think the country bottomed in the third quarter of 2012, according to data compiled by Bloomberg an index of 39 Chinese companies shows they missed analyst earnings projections by more than 7%, in line with an economy expected to grow at its slowest rate in more than a decade.
Make no mistake, the U.S. would give its eyeteeth to achieve growth like that again, but government stimulus spending has distorted the view, and with Europe mired in a recession again and the U.S. economy flagging, hopes for any renewed vigor in the East is doubtful. The trend is apparent as marquee Internet names like Baidu.com, NetEase.com, and Sohu.com falter.
As expenses grew last quarter, Dangdang's own losses continued to widen, even if they were narrower than what Wall Street anticipated. As customer numbers dwindle, the market has grown increasingly worried it may not be able to get them back, and the stock's tumbled 63% since it hit record highs in April.
It's all the same to me
I'm not seeing any catalyst to differentiate Dangdang from the rest of its many rivals. While the stock does trade at less than half its sales, cheap stocks can often be cheap for a reason and arguments for recovery don't pan out as much as investors might hope. With revenue growth slowing, expenses growing, losses widening, and a consumer-dependent economy dragging lower along with the rest of the world -- not to mention rising competition -- there's no reason to think E-Commerce China Dangdang will regain its former glory or even be able to gain much altitude from here.
No doubt Dangdang bulls will say it's just a matter of time, but there are far better investment vehicles that can be accessed now instead of having to wait for some chanced-upon miracle. But let me know in the comments section below whether you should still give a dang about this e-commerce play.
