Baozun (NASDAQ: BZUN) rocketed nearly 25 percent in January. The Chinese e-commerce solutions company is often referred to as the country’s version of Shopify — Baozun provides IT infrastructure services, merchandising, online store setup and design, marketing campaigns, order fulfillment, warehousing and more. In fact, Baozun even sells an array of branded products through its Maikefeng mobile app.
With the company’s stock on the rise, it’s time to take a serious look into whether or not it can sustain this level of growth. First, let’s explore the value of the company itself.
Baozun’s Core Business
Baozun’s primary work is behind-the-scenes for retail companies looking for an online shop that allows for e-commerce sales. The company does everything from establishing online storefronts to sorting out logistics, managing inventory and employing AI to enhance business performance.
Baozun is tied to China’s top consumer sites including Alibaba’s Tmall. The business is also integrated with JD.com, a group that provides clients with access to over 700 million web users who spend upwards of $700 billion every year.
It is interesting to note Baozun is partially owned by Alibaba, which holds a 17 percent stake in Baozun. Another 13 percent of the company is owned by Softbank. These stakes serve as strategic advantages as both companies are loaded with resources.
So, why has the company’s stock soared?
Baozun is segueing from a distribution model to one with service fees. In a nutshell, this means the company is focusing on expanding profits as opposed to top-line growth. Baozun recently reported a 15 percent hike in customers and a 71 percent bump in gross merchandise volume. Services revenue jumped 55 percent this past quarter. While operating expenses increased by nearly 20 percent, the cost of goods sold has declined.
China’s Appetite for Online Sales is Growing
One thing is certainly clear: more and more Chinese are purchasing goods and services online.
Economists estimate the value of the country’s online sales will jump from $750 billion in 2016 to upwards of $1.7 trillion in 2020. To say the Chinese market is massive would be an understatement.
What makes this market even more appealing is the fact that its internet penetration rate is a mere 52 percent. The internet penetration rate in the United States is upwards of 90 percent. Baozun has plenty of room to grow as it serves as a one-stop shop for businesses looking to sell on the web. It is perfectly positioned to rake in the profits with its IT services, fulfillment and marketing services.
Ride the Wave or Take Profits?
If you own Baozun, you are likely pondering whether you should take some profits off the table or hold steady. Seeing as the company’s stock jumped over 160 percent this past year, the question is whether the rise is legitimate or if it is fueled by investor enthusiasm and general momentum.
It is interesting to note the stock dropped nearly 10 percent on February 2, the day the market slid about 2 percent. It is clear investors are not completely confident in Baozun at its current valuation. However, while Chinese stocks tend to be more volatile than those in the United States, Baozun is not as risky as it appears.
The company is generating a profit. Furthermore, its bottom line is rapidly expanding, and earnings are on the rise. It appears as the only thing that might hold Baozun back is the stock market’s fluctuations. If you have owned Baozun for a while, you are likely tempted to take some profits off the table. However, this is a mistake.
Buy or Hold Baozun
Baozun’s 2017 earnings reports were nearly flawless. These earnings have spiked investor confidence, bringing considerable share price gains. However, the stock has endured a couple steep sell-offs due to overall market trends, profit-taking and general hesitation about the company’s valuation. The stock is certainly pricey. It is currently trading around a 50 multiple of its earnings estimates. However, Baozun will likely continue to rise in the long-term.
This is the type of stock you should buy and hold for years. Upwards of 40 percent of China’s population is not yet connected to the web. Baozun is in an excellent position to capitalize from this growth. Add in the fact that the country’s middle class is rapidly growing and it is easy to see why new businesses will be interested in Baozun’s services.
If you own Baozun, consider taking a small portion of your profits off the table. However, you should hold firm with the bulk of your position. If you do not own Baozun and the market continues to slide, consider scooping up some shares and holding for the long haul.
Regards,
Ethan Warrick
Editor
Wealth Authority
