INTERNET – E-Commerce In Bloody Sell-Off On Ho-Hum Results

By newsdoug on November 20, 2014

Bottom line: The post-November 11 sell-off for Chinese e-commerce shares will persist for the next few months until most trade at or slightly below their IPO levels, and then shares will trade mostly sideways next year.

Black Friday may only be a week away in the United States, but the landscape for China’s high-flying e-commerce companies was notably red with blood in the latest Wall Street trading session after a number of players issued new financial results. The numbers weren’t all that bad for the red-hot Vipshop (NYSE: VIPS), though people were probably expecting more from this company whose shares have exploded 40-fold since their IPO 2 and a half years ago. The picture was far more mixed for second-tier e-commerce players Jumei (NYSE: JMEI) and LightInTheBox (NYSE: LTIB), which also isn’t surprising due to the stiff competition in the market.

The share sell-off was quite broad, hitting all of the major Chinese players now listed in New York. Leading the downward charge was Jumei, whose shares tanked 10.8 percent in after-hours trade after it reported very so-so results. If the drop holds, Jumei will become the first recently listed e-commerce firm to achieve the dubious distinction of seeing its shares drop below their offering price.

Jumei certainly wasn’t alone, as Vipshop shares also shed 5.3 percent, and are now down 6.5 percent over the last 5 days. LightInTheBox fell 3.1 percent and is now down 8.6 percent over the last 5 days. JD.com (Nasdaq: JD), China’s second largest e-commerce player, was down 3.6 percent and is down 12 percent over the last 5 days. And last but certainly not least, industry leader Alibaba (NYSE: BABA) was down 1.8 percent, wiping out nearly $2 billion in shareholder value. Like its peers, Alibaba is also down a sizable 8.4 percent over the last 5 days.

So, what exactly is happening here? As I’ve said above, the earnings from most of these companies are mostly quite respectable, with revenue often up by 50 percent or more. Profits are a little more problematic, with many of these companies drifting back and forth between the profit and loss columns as they fight a bloody nonstop battle for market share. But most significantly, most of these companies shares were already valued quite high at the time of their IPOs and saw additional run-ups afterwards.

Investor appetite for the shares reached a crescendo in the run-up to this year’s Double Eleven shopping day, which fell last Tuesday, when most companies posted record single-day sales. Now the hype is starting to fade, and many short-term buyers who purchased the shares to make some quick money are selling off their stock to lock in profits before the end of the year.

All that said, let’s look quickly at the latest string of results announcements that illustrate the checkered performance for this group. Leading the pack was Vipshop, a discount seller of fashion goods, which reported revenue and net income jumped by a hefty 130 percent. (company announcement) Online cosmestics seller Jumei reported a less stellar 28 percent rise in revenue, though its profit grew by a much faster rate of nearly 90 percent. (company announcement) Last there was LightInTheBox, a seller of Chinese goods to overseas buyers, which saw revenues rise by a healthy 45 percent but reported the latest in a string of net losses for the period. (company announcement)

JD and Alibaba have already reported their results, meaning investors are now largely aware of what these companies are capable of in terms of financial performance. All that said, the looming question is whether this sell-off marks the beginning of a longer-term trend or is just a short-term correction. I’ll take the middle road and say the sell-off is an industry-wide correction, but it’s one that will probably see most of the shares trade mostly sideways and slightly downward in 2015. I would expect most of the stocks to return to their IPO levels or even fall below up to 10-20 percent below that in the months ahead before they finally find some stability.