Is Vipshop Holdings a Buy Under $20? China-based online discount retailer Vipshop (VIPS) has achieved decent growth over the past few years. However, increasing regulatory pressure has di...
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China-based online discount retailer Vipshop (VIPS) has achieved decent growth over the past few years. However, increasing regulatory pressure has diminished investors' attention in the stock over the past several months. So, having declined 29.4% so far this year, can the stock's price rebound in the near-term. Let's discuss.
Headquartered in Guangzhou, China, Vipshop Holdings Limited (VIPS) pioneered the online discount retail model in China, providing special offers and deep discounts on branded products. Leveraging its unique business model, its business has grown significantly over the past few years. Its revenue and EPS have grown at 13.2% and 47.2% CAGRs, respectively, over the past three years. However, its shares have been on a downtrend lately amid increasing regulatory pressures on its business in the United States and its home country.
The stock has lost 44.6% over the past three months and 15.3% over the past month to close yesterday's trading session at $19.85. It is currently trading 56.8% below its $46 all-time high, which it hit on March 23, 2021.
Even though VIPS reported impressive financials for its first fiscal quarter (ended March 31, 2021), it provided only moderate sales guidance for the second quarter. The company said it expects its revenue to be between RMB 28.90 billion ($4.46 billion) and RMB 30.10 billion ($4.65 billion) in the second quarter. So, the stock's near-term prospects look uncertain.
Here's what we think could influence VIPS' performance in the coming months:
Robust Financials
For the first quarter, ended March 31, 2021, VIPS net revenue increased 51.1% year-over-year to $4.33 billion. This was driven mainly by growth in its number of total active customers, which came in at 45.8 million for the quarter, up 54% year-over-year. The company's gross merchandise value (GMV) increased 59% year-over-year to RMB 46.10 billion ($7.12 billion). VIPS' net income for the quarter increased 127.3% from the same period last year to $236.23 million. And its earnings per ADS was $0.33, up 118% year-over-year.
Share Repurchase Program
On March 30, VIPS' board of directors authorized a share repurchase program under which the company may repurchase up to $500 million of its Class A ordinary shares over a 24-month period upon the establishment of the share repurchase program. The company is expected to fund the repurchases from existing cash. So, the move will reduce VIPS' cash reserves significantly.
Increasing Regulatory Concerns
Maintaining the former President Trump's tough stance on China, President Biden signed an order on June 3, 2021 banning investment in dozens of Chinese defense and tech firms on the grounds that these companies could pose national security threats. Approximately 59 companies were on the updated list, including tech giant Huawei.
Several Chinese companies are also facing increasing regulatory pressures from Chinese authorities for alleged anticompetitive practices. According to BlackRock, Inc.'s (BLK) portfolio manager for global emerging markets equities, Lucy Liu, China's crackdown on big tech could last for several years. So, we think the increasing regulatory pressures could have a negative impact on VIPS' operations and limit its market expansion.
POWR Ratings Reflect Uncertain Near-Term Prospects
VIPS has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, VIPS has a C grade for Quality. This is justified given its 20.87% trailing-12-month gross profit margin, which is 39.6% lower than the 34.57% industry average. It has a C grade for Momentum, which is in sync with the stock's 44.6% loss over the past three months and 15.3% decline over the past month. Also, the stock has a D grade for Stability.
Of 74 stocks in the D-rated China group, VIPS is ranked #17. Click here to see the additional POWR Ratings for VIPS (Sentiment, Growth and Value).
Better than VIPS: Click here to access 16 top-rated stocks in the same industry.
Bottom Line
While VIPS grew significantly over the past few years on the back of its unique business model, it's shares have been losing value over the past few months. This can be attributed primarily to regulatory pressure and increasing competition from its peers—such as JD.com, Inc. (JD) and Alibaba Group Holding Limited (BABA). So, we think it's better to wait before scooping up its shares.
VIPS shares rose $0.50 (+2.52%) in premarket trading Friday. Year-to-date, VIPS has declined -29.38%, versus a 14.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.
