If you listen to Morgan Stanley analysts, it’s time to buy JD.com (JD) and sell Vipshop Holdings (VIPS).
The firm makes some great points, but much like with Tesla (TSLA) recently, Morgan Stanley analysts have it all wrong.
MS essentially believes that a partnership with Tencent will further boost JD’s user and revenue growth in 2016, better than the already bullish outlook that surrounds the company.
In regards to VIPS, Morgan Stanley thinks that competition will continue to intensify, and that VIPS will have to boost its marketing spend in order to drive user growth.
As a result, MS predicts that Vipshop’s margin will be pressured.
The bottom line is that Morgan Stanley foresees 10% upside for JD and potentially 20% downside for VIPS. Clearly, the outlooks are much, much different.
Things Don’t Add Up
Sometimes, both analysts and investors forget to use common sense.
For example, if increased competition among nontraditional companies will affect VIPS, then wouldn’t that also affect JD? After all, JD’s sub-20% market share of China’s e-commerce market is far higher than the tiny 3% of the pie that VIPS controls.
Furthermore, VIPS is a niche e-commerce service provider with flash-selling — the art of buying, selling and shipping in bulk. Meanwhile, JD.com may not share Alibaba’s (BABA) business model to create revenue, but it does target the same everyday online shoppers.
Therefore, Morgan Stanley does not make sense when it notes increased competition as a reason for VIPS to fall 20% and JD to rise 10%. What’s even more unusual is that MS actually mentioned margins in a debate between JD or VIPS.
Due to the fact that VIPS buys, sells and ships in bulk, its costs are naturally lower. Over the last 12-months, Vipshop’s operating margin has been nearly 5%, whereas JD’s margin is negative 2% during the same span.
Clearly, that is a big disconnect, and makes you wonder what in the world MS analysts are looking at.
The Bottom Line
With that said, sentiment for VIPS is far lower than JD, but in many ways, that is what makes VIPS so appealing. Over the last six months, VIPS has fallen 30%, but the cause was understandable. The company’s last quarter showcased weak sales growth of (just) 60% because its inventory was more winter-focused.
That’s because the weather in China stayed warmer longer than expected, and for a company that stocks and sells inventory in bulk, that unexpected delay in colder weather caused problems.
But these are solvable problems: Vipshop is expected to grow revenue 40% next year and add 5.4 million new active customers to bring its total to 14.6 million in Q3. All signs are pointing in a bullish direction for VIPS stock.
While there is nothing particularly bearish about JD’s respective direction, it is somewhat strange that MS’s upgrade is mostly tied to an advertising revenue business that accounts for well under 10% of total revenue. Importantly, this is the one part of JD’s business that is not subject to the same competition-related concerns that MS noted as a problem for VIPS.
Therefore, when choosing between the two stocks, VIPS most certainly looks far superior after its losses.
With VIPS stock losing nearly half its value, and the majority tied to an explainable error in calculating inventory and supply during Q3, Vipshop’s losses look like a great investment opportunity, whereas one must wonder how much upside is left in JD stock.
As of this writing, Brian Nichols was long VIPS.
