It wasn’t all that long ago when many market pros thought online retailers were essentially a fad. Sure, Amazon.com (AMZN) was selling a lot of products, especially books. But online auction site eBay (EBAY) was still a relatively new concept, and many questioned the viability of the business models and the potential upside in online retail stocks.
Well, time has proven kind to both Amazon and eBay, as the stocks of the online retailers are up 341% and 142%, respectively, over the past five years.
However, during the past year, both Amazon’s and eBay’s share prices success has been much more modest. AMZN shares are up a healthy 19.2%, while EBAY has managed to push just 8.5% higher over the past 12 months.
Now, let’s compare the U.S.-based online retail giants with the two biggest publicly traded China online retailers, E-Commerce China Dangdang (DANG), or simply Dangdang, and Vipshop.com (VIPS). Over the past 12 months, both Dangdang and Vipshop have trounced the performance of their U.S. counterparts, with DANG surging some 74%. VIPS is the truly impressive stock, rocketing an incredible 778% higher over the past year.
The performance in VIPS is the kind of share price appreciation that investors dream of, but I think many investors still don’t have a clue about the growth opportunities present among China’s online retailers.
If we fly up and take the 30,000-foot view, we see that China’s online retailing extends across the country, and as far as the eye can see. For example, as of June 2013, there were more than 590 million China Internet users — a number that dwarfs the total U.S. population of approximately 315 million. There also was a mind-blowing 464 million mobile phone users in the country.
China’s overall GDP growth rate was 7.5% in the second quarter of 2013. And while that number has decreased over the past couple of years from the peak of nearly 12% in 2010, that metric remains the envy of rival economies such as Japan and the U.S.
As for online commerce growth, China now is expected to trump the U.S. as the world’s largest digital retail market. According to a new report from private equity firm Bain & Company, in 2012, Chinese e-commerce shoppers spent RMB 1.3 trillion online. That number has grown at pace of more than 70% annually since 2009. Bain wrote that it expects this growth to continue, and reach some RMB 3.3 trillion by 2015.
Here’s the money quote from the Bain analysis:
“Digital retailing has furiously transformed shopping and purchasing habits, opening up vast opportunities for retailers and brands that pay attention to the nuances of massively changing consumer behavior.”
At the forefront of those changes is Dangdang. This is the company that most resembles Amazon, as it first began as a bookselling site (just like Amazon), then quickly branched out into selling all sorts of consumer products (just like Amazon). The company did recently post strong revenue numbers, though it has yet to turn a quarterly profit. Still, in its most recent quarter the company saw 15 million orders and $243.3 million in revenue. Not too shabby.
As for Vipshop, the company already is in the black. In its most recent quarter, the so-called “flash sale” site (think of U.S. online retailer Gilt for a comparison) earned 20 cents per share on a revenue increase of 160%. Indeed, earnings growth and revenue have been consistently strong for Vipshop, and that has helped fuel the gigantic share price gains.
Interestingly, there are worries that Vipshop’s future growth will not keep up its current pace, and that this will lead to a big selloff in the shares.
While I certainly think this could be the case — especially given the recent move higher in the stock — so far there has been no lack of appetite for VIPS shares, and over the past month the stock has seen a near 32% gain.
For momentum players looking for truly hot web-based technology plays, it might be time to start looking outside U.S. borders and set your sights on the burgeoning e-commerce market and online retailers in China.
Doing so just might make you some hot-dang VIP profits.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.