Talking Stocks: Vipshop Holdings
Updated: Jun 23
Chinese stocks are becoming the new talk of the town.
Are they really that new though? People on Wall Street have been talking about moving their investments from the US to China for a while, but the idea still hasn't gained enough traction to make a proper impact.
Alibaba → Down from $317 to $230 per share.
Tencent → Down from ¥764 to ¥620 per share.
Baidu → Down from $338 to $210 per share.
In other words, people are still fearful of the political tensions in China, causing even the best stocks in the country to remain depressed. But let's not forget why some of these banger stocks fell more than others.
As we mentioned in our last article on Baidu, a hedge fund named Archegos recently exploded: causing all of the stocks it held to also go downhill. Among those names were Tencent, Baidu, Farfetch, and...
Like Baidu, Vipshop is another company that bit the dust just because of its association with Archegos, not because there's anything wrong with the business itself.
The perfect opportunity to pounce.
Vipshop in 2 Seconds
Vipshop is another e-commerce platform that's beginning to grow its presence in the Chinese market. Their USP?
Vipshop mainly caters to discounted products: providing extremely affordable clothes, accessories, sportswear, furniture, and more. Given that over 82% of China's population live as Low to Lower-Middle Class citizens (earning $2 to $20 per day), cheaper shopping combined with a variety of options would be considered highly valuable.
With a consistent revenue stream, a strong balance sheet, low debt, and profits growing at 25% a year, Vipshop's financials make it difficult to justify a small, $30 price tag. It seems like it should be higher, but that means nothing unless we attach some numbers to it.
Here's what Simply Wall Street's analysis has to say:
In other words, based on Simply Wall St's work, Vipshop stock currently trades at a ~60% discount to its fair value: which means there's potential to more than double your investment if the stock reaches the fair value number above.
I can't speak to exactly where the price should be, but the fact that the company financials are solid and the reason it dropped almost 30% was because of a hedge fund going bankrupt (see our Baidu article for a short explanation) — this stock should definitely trend higher in the coming months.
A recent report by Shopify (another great stock) detailed several key trends to note for 2021 and beyond: one of which was the impressive speed of e-commerce growth.
Obviously, we need to consider that this graph is for US data and that the rapid growth will taper slightly as economies begin to reopen. Still, the principle that e-commerce is growing is prevalent here, with the same report showing that China's e-commerce progress was particularly high last year —
Bringing them up and only behind the United States in terms of global cross-border sales online.
Bestselling book One Up on Wall Street said that managerial ownership is a key trait we need to look for in stocks. In other words, how much skin in the game does the CEO have?
Luckily for us, both co-founders of this company sit on the management board as well as the board of directors, with almost 20% in joint control. This means that they've got a strong hold over the decisions that are made and most importantly, they've got a financial incentive to ensure that their company reaches the next level.
So...what are we left with?
Great financials, a fast-growing market, and the right management considerations — seems like a no-brainer to get into this stock!
Not so fast. We should consider that, even though it seems solid on its own, Vipshop is still a small fish among a sea of sharks.
Data from early 2020 shows that Alibaba controlled 56% of the e-commerce market that year, followed by JD.com's 17% and Pinduodo's 7%. Vipshop finished in 6th place, with only 1% of the market.
That suggests an element of volatility: it might not be a smooth track upwards, but based on the things we've talked about today, the direction should still be upwards.
Here's what I'd suggest: if you're going to get into Vipshop, dollar-cost average (DCA) into it. Put some in now and see where the market goes over the next few weeks: if the initial things that attracted you to the stock look like they'll still be there over time, you should be comfortable putting in some more and then building a bigger position (if you want) over time.
That's what I did. My first position went in at $26.98, and after a while, I opened a second at around $29.50.
I'll be keeping an eye out for opportunities to dig in at a third - let me know what you do! I'll see you in the next one 👋
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