Vipshop Left Behind In China Tech Stock Rally; A Value Buy?

The ‘daily deal' e-commerce company reported a third consecutive quarter of declining revenue, though the declines are moderating

Key Takeaways:

• Vipshop's revenue fell for a third consecutive quarter in the final three months of 2024, though it could return to growth this year
• The company's stock has been relatively overlooked during the recent China tech rally, up just 16% in the last six months compared with much larger gains for Alibaba and JD.com   

What China stock rally?

While Chinese stocks have jumped dramatically over the last six months, especially tech companies, you would never know from looking at Vipshop Holdings Ltd. (VIPS). The discount e-commerce company was once an investor darling, known for its "deals of the day" bargains that it offered by working directly with well-known brands.

But these days the company's growth has flatlined in sync with growing consumer caution in China. That trend was front-and-center throughout the company's latest quarterly report released last Friday, which saw nearly every major metric fall for the three-month period. Making matters worse, one of the few metrics to rise was Vipshop's spending as it ramped up promotions to stimulate demand, eroding its margins.

On the more positive side, the company saw strong performance from its Super VIPs, echoing a trend seen from much larger rival Alibaba (BABA), which also announced its latest quarterly results last week. Chairman Eric Shen also may have heartened investors with his assessment on the company's earnings call that "We think everything should get back to the positive trajectory" this year. Still, he was quick to add the caveat: "That's what we hope."

While hardly encouraging, the number of positive signals coming from Vipshop's latest report seemed to slightly outnumber the negative ones, helping to lift its shares by 1.4% on Friday after the announcement. But the stock is up just 16% over the last six months, and is actually down 13.3% over the last year.

By comparison, Alibaba is up 68% over the last six months, and rival JD.com (JD) is up 58%. Former superstar PDD (PDD) is doing even worse than Vipshop, with its shares down 6.1% over the last six months. But much of PDD's recent woes owe to strong pushback lately against its international Temu bargain e-commerce service, especially in the U.S.

The broader rally, which has seen Hong Kong's Hang Seng Tech Index soar by more than 70% in the last six months, has also breathed new life into Alibaba's price-to-earnings (P/E) ratio, which now stands at relatively respectable 21. JD.com and PDD are a bit behind that at 14 and 13, respectively, while Vipshop has gotten completely left behind with a ratio of just 7.5.

We've always noted that this company is quite conservative, though such conservatism should be a strong selling point in this kind of difficult consumer environment. Reflecting its conservatism, the company managed to increase its cash holdings to 27 billion yuan ($3.72 billion) at the end of last year from 26.3 billion yuan a year earlier. It also reiterated its intent to continue buying back shares and pay another annual dividend, after launching its dividend program last year.

But at the end of the day, investors are probably worried that PDD and Alibaba can leverage their larger sizes to better chase and capture the value-oriented customers that are Vipshop's bread-and-butter.

Shrinking revenue

Vipshop's revenue fell 4.3% in last year's fourth quarter to 33.2 billion yuan from 34.7 billion yuan a year earlier. That marked the third quarterly decline for the company, but was an improvement from the 9.2% drop in the third quarter. The company forecast its revenue will be flat to down 5% in the current first quarter, making it quite likely the rate of decline will continue to moderate and could even return to growth later this year.

The old saying goes that food, shelter and clothing are the three basic necessities that everyone needs, and Vipshop's results seem to confirm that truth. Despite the overall quarterly revenue decline, the company said one area that grew during the quarter was its core apparel business, showing that even in difficult times everyone still needs clothes. Chairman Shen said apparel accounted for 75% of the company's gross merchandise value (GMV) during the quarter, the highest level in the company's history.

Two other areas that did relatively well during the quarter were home appliances and digital products. But that bump is unlikely to continue, since it was owed largely to a government-funded program aimed at boosting consumption by offering subsidies for people who traded in old home appliances and other devices for new ones. 

Vipshop didn't say which products performed so poorly to bring the overall revenue figure down for the company. But other major categories featured on its website include luxury goods, jewelry and makeup, most of which are the types of discretionary products where consumers are likely to cut back in difficult times.

The other bright spot for Vipshop was its Super VIP customers, which "demonstrated strong momentum with double digit growth" during the quarter, according to Shen. The number of such super-spenders grew 50% during the quarter year-on-year, and accounted for 51% of online spending during the period. Alibaba, which also reported its latest quarterly earnings last week, noted a similar trend, pointing out that its 88VIP membership grew by double-digits in the three months to December to reach 49 million. Vipshop's Super VIP membership was much smaller, at 8.8 million members for all of last year.

On the negative side, Vipshop's overall active customer base fell 5.8% during the latest quarter, while its total orders dropped 7.2%. As we previously pointed out, the company's expenses were the one major metric that rose during the quarter, up 4.1%, led by a 10.3% jump in marketing expenses and an even larger 20% rise in general and administrative expenses.

That increase eroded the company's gross margin, though the drop wasn't that dramatic, falling to 23.0% in the latest period from 23.7% a year earlier. As a result, Vipshop's non-GAAP net income, which excludes certain non-cash items like stock-based employee compensation, fell 6.3% to 3 billion yuan from 3.2 billion yuan a year earlier.

The bottom line for this company is that its days of heady growth are in the rear-view mirror and unlikely to return until China's economy improves. Still, its shares really do look left behind in China's recent tech rally, meaning they could see some potential upside if and when they get discovered by value-oriented investors.