Will Dangdang Ever Recover From Its Post-IPO Plunge?

On Thursday, E-Commerce China Dangdang (DANG) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise.

During the big rise in the Chinese Internet industry, investors made many comparisons between small Chinese upstarts and their established U.S. counterparts. Cited as the analog to dominant U.S. online retailers, Dangdang was seen taking advantage of the rising middle class in the emerging-market nation's economy, but its stock has floundered ever since its late-2010 IPO. Let's take an early look at what's been happening with Dangdang over the past quarter and what we're likely to see in its report.

Stats on Dangdang

Source: Yahoo! Finance.

Will Dangdang ever make money?
Analysts have had mixed views recently on Dangdang's earnings, boosting their first-quarter and full-year 2013 estimates by $0.01 per share but dramatically widening their loss projections for 2014. Despite the stock's weak long-term performance, it has rebounded over the past several months, jumping 14% since early February.

Dangdang has done a good job of ramping up its business, with a 44% increase in revenue in 2012 coming mostly from media revenue. That reflects Dangdang's attempt to shift from its past focus as an online bookstore to offer a more extensive online shopping-mall experience.

But competition has been heating up in the Chinese online marketplace industry. Domestically, competitors like Alibaba and Jingdong have made major strategic moves of their own to boost their sales. Meanwhile, Amazon.com's (AMZN -0.48%) Amazon China service has been trying to expand its presence, and although Amazon doesn't break out its international results by region, it has been willing to operate at much lower operating margins globally than in its North American segment. That's consistent with Amazon's typical competitive strategy of cutting prices as far as possible to stave off competition. Moreover, Microsoft (MSFT -0.25%) has also entered the market, opening its third online store in China back in March rather than partnering with Amazon or Dangdang. That signals Microsoft's intention to try to build up its own online ecosystem in China in order to capture more of the mobile market there.

One way that Dangdang hopes to boost its sales is through daily deals. The company launched its Weipinhui "flash sales channel" early this month, with expectations of starting with apparel sales and then expanding into other areas. Yet with Alibaba's Juhuasuan daily deal site already leading the industry, Dangdang could struggle to build a commanding presence in daily deals.

In Dangdang's quarterly report, watch for any signs of slowing growth from headwinds against the Chinese economy in general. Dangdang is too small right now to justify even current valuations if it can't keep growing well into the future.

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