Baozun (NASDAQ:BZUN) is a Chinese e-commerce company that’s posted big stock gains since its market debut in 2015, with shares having more than tripled since its IPO. However, it has recently hit some turbulence, and it’s not unreasonable to expect that the stock will continue to be volatile.
BZUN data by YCharts.
Shares hit a lifetime high of $67 last summer thanks to consistently encouraging sales and earnings performance, progress on the company’s transition to a higher-margin and more software-focused model, and investor appetite for growth potential in China’s e-commerce industry. But Baozun’s summer run was cut short amid a broader downturn for Chinese stocks — as intensifying trade tensions with the U.S. raised potential roadblocks to growth, and were followed by data showing that China’s economic growth was slowing.
The shifting economic dynamics dampened the market’s outlook on Baozun, and today, shares trade in the $34 range. While the market now appears to be pricing in slower growth and more risk, much of the core bullish thesis remains intact, and Baozun stock deserves a look from risk-tolerant investors.
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An e-commerce platform with big growth potential
Baozun is a company that’s playing a key role in helping Western brands crack China’s large and fast-growing online-retail market. The business provides customizable e-commerce websites, warehousing and order fulfillment, and customer-management services. In addition to these features, Baozun can offer tie-in sales portals across China’s largest e-commerce connection points — including platforms like Alibaba’s Tmall, Tencent’s WeChat, and JD.com. This makes the company a sort of one-stop shop for brands looking to quickly deploy and scale up in China’s online retail market.
Baozun counts companies including Nike, Starbucks, and Microsoft among its 170-plus brand partners. And there’s big potential for sales and earnings expansion as it adds new partners and as it benefits from merchandise-volume growth for stores already on its platform. Management says that it has major new partners in the apparel, luxury, and fast-moving consumer goods categories joining the platform in the near future. It’s feasible that the company will be able to continue growing its customer base over the long term. And a pivot away from warehousing and order fulfillment in favor of prioritizing software and services should continue to be a beneficial margins catalyst.
Shifting macro trends shouldn’t sink Baozun
While Baozun did report lower-than-expected sales growth on Singles Day (China’s biggest shopping holiday) followed by rising third-quarter expenses in November, the big sell-offs over the last six months may have had more to do with shifting sentiment about the overall growth outlook in China. Chinese stocks got absolutely crushed last year (after impressive performance in 2017), and the country’s tech sector was particularly hard hit.
Shares of the Invesco China Technology ETF, which combines 70 different tech stocks from the country and is a good benchmark for industry performance, fell 35% across 2018. Amid that backdrop, it’s far from shocking that Baozun has lost ground, but there are still good reasons to like the company and the long-term outlook for online retail in China.
China already has the world’s largest e-commerce market, with its $1.15 trillion in 2017 sales accounting for roughly half of global spending in the year. Research firm eMarketer reports that its e-commerce market grew to roughly $1.5 trillion in 2018 and expects that the country’s online retail market will climb to nearly $2 trillion this year. A slowdown for the Chinese economy and the possibility that trade disputes with the U.S will continue to inhibit growth could weigh on the stock, but there’s big opportunity for risk-tolerant investors with a long time horizon.
Cheaply priced growth in a promising industry
Baozun is delivering solid sales growth and impressive earnings momentum even as it incurs expenses related to its business transition and investment in new technologies. The company’s chief financial officer mentioned during the last earnings call that the company could have grown its non-GAAP operating income 90% year over year in the quarter (compared with the 48.6% growth it actually recorded) if it excluded its innovation-expenses investments. The company sees research and development expenses growing at a substantially slower rate in 2019, so shareholders may see earnings accelerate in the not-too-distant future.
The average analyst estimate as polled by Reuters targets a five-year earnings growth rate of roughly 48%. If Baozun can deliver on that hypothetical trajectory, the passage of time will cast shares as a steal at current prices. The company should continue to benefit from strong growth for online retail and improving margins as it pivots away from merchandise warehousing and prioritizes its software and services platform. And shares have appealing upside, trading at roughly 22 times this year’s expected earnings.