Vipshop Holdings Ltd (NYSE:VIPS) is one of China’s more heated battleground companies. VIPS stock started US trading back in 2012 around a (split-adjusted) 50 cents per share. It then launched a mercurial run, with VIPS stock reaching as high as $30. That, is a 60x return for IPO investors within a couple years.
After VIPS stock peaked in 2015, it’s been a much different story, however. Since then, the stock has lost almost two-thirds of its value. It sits around $11 today, down sharply from its previous heights, though it’s still a twenty-bagger off the IPO.
Why’d VIPS stock fall so far?
For one thing, various research firms suggested that Vipshop’s incredible story was too good to be true. Short sellers have leveled substantial fraud charges against the company. Add a slowdown in Vipshop’s earnings trajectory, and investors have lost their love for the stock. So what’s the deal now? Is Vipshop a bargain or best avoided?
Vipshop: Is Third Place Enough?
While data is hard to measure with complete certainty out of China, based on reported transaction volume, Vipshop appears to be the third largest online retailer in China. It is nowhere close to either Alibaba Group Holding Ltd (NYSE:BABA) and their Tmall platform, or #2 JD.com Inc (NASDAQ:JD). But third place is good enough to support a strong valuation, right?
In the United States, pureplay online direct-to-consumer retailers other than Amazon.com, Inc. (NASDAQ:AMZN) haven’t gotten much attention from the market. Companies like Overstock.com Inc (NASDAQ:OSTK) fail to generate much retail interest unless they do something different, such as Overstock’s more recent blockchain efforts.
However, in Vipshop’s case, they have two things going for them.
For one, China is a way larger total market than the United States. Internet and smartphone penetration has been incredibly fast in China – far faster than other emerging markets. Thus, despite having similar GDP/capita to other EM plays like Brazil, China is a much more attractive market. The gigantic total population and attractive demographic profile (lots of young consumers) also helps.
In addition, Vipshop has made a credible effort to differentiate itself from JD and Alibaba’s Tmall. Vipshop brings two important factors to the table. For one, it tends to focus on a niche, fashion, rather than trying to sell everything under the sun. Vipshop has also focused on lower-priced and discount goods, taking up a sort of outlet model. All in all, Vipshop has achieved modest success. It is #3 in China, but with an estimated sub-5% B2C market share, compared to about 55% for Alibaba and 30% for JD.
Is Vipshop On The Up And Up?
Mithra Research first published on Vipshop in 2015. They put out various reports (Editor’s Note: Paywall) with explosive accusations.
Mithra made the following points (among others): (1) Vipshop could be inflating its revenue numbers by reporting gross revenues when a consignment method was more appropriate. (2) The company’s reported inventory numbers contradicted management’s statements on the matter. (3) The company grossly overpaying for acquisitions such as Lefeng potentially allowed insiders to take advantage of foreign investors.
That’s not all. Mithra highlighted discrepancies between the company’s reported earnings and its cash flow. As the saying goes, “cash flow is king” whereas accounting profits can be less reliable. Numerous Chinese companies historically with strong reported earnings had less inspiring cash flow from operations and ended up having to restate their financial reports.
Other short-selling firms, such as Street Watchdog, followed up on Mithra’s work. You can see this example publicly, where Street Watchdog points out seeming “accounting irregularities” of almost $150 million.
If you’re going to buy VIPS stock as a long-term investment, you need to get comfortable with the accounting standards and management team. Given the huge run-up in VIPS stock since its IPO, credibility is a key concern here. Why IPO at a tiny valuation if the future was so bright?
A Substantial Backer
On the other hand, if you want to make the case for VIPS stock, management has a key point of credibility: its big-name backer. JD.com — on the surface a competitor — took a small stake in Vipshop awhile ago.
Recently, JD.com bumped this stake up to 6.8% of Vipshop’s stock. Earlier this year, JD purchased more than 8.5 million shares of VIPS stock on the open market at an average price in the $14 range. That’s quite interesting indeed, given that VIPS stock is now substantially below that price.
It also speaks to potential value at Vipshop as a partner for JD, rather than a rival. In the battle against Alibaba, JD has sometimes turned to unlikely places for allies. While Alibaba and JD both make tons of equity investments in other Chinese firms — and many end up being busts — it’s still quite a move. JD should know Vipshop better than most other market participants, and it wants to own more VIPS stock.
VIPS Stock Verdict
Vipshop’s last earnings report was a major stinker. Seemingly due to escalating costs, the company saw its earnings barely grow, despite respectable gross revenues growth. It also reported just 2% active customers growth for the quarter, and offered uninspiring guidance for the next quarter. Not surprisingly, VIPS stock plummeted, and has made little move to recover as of yet.
In my history with companies whose accounting is questioned, this sort of report could actually be a positive, however. Theoretically, if the company were juicing the numbers, and it were to subsequently stop, you’d see a sharp decline in operating performance. Vipshop’s massive revenue slowdown and even worse earnings trajectory could reflect a company that previously pushed the envelope and is now using more conservative accounting.
In any case, if you trust Vipshop’s numbers, VIPS stock looks interesting here.
It is selling at under 0.6x sales, which is silly cheap for a growing profitable online platform. At 23x trailing earnings, and 10x forward, VIPS stock is priced to move. JD’s increasing endorsement of Vipshop is also intriguing.
As for me, the accounting issues that Mithra and others raised are a major concern. I’m content to have exposure to Vipshop solely through my holding in JD stock. However, for risk-tolerant investors, VIPS stock could be an interesting play here, especially if they can put up a better earnings report next quarter.
At the time of this writing, the author owned JD stock and had no positions in the other aforementioned securities. You can reach him on Twitter at @irbezek.
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