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AMZN's Miss Makes DangDang an Easy Short

Stocks in this article: DANGAMZNRENN

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

BEIJING ( TheStreet) -- Shares of Amazon.com (AMZN) slid as much as 10% in afterhours trading following its release of disappointing fourth-quarter results on Tuesday. The AMZN selloff led shares of Ecommerce China DangDang (DANG) to fall by 3% to 4% in afterhours, after it was already down by more than 10% during the regular trading session. The question for investors is: what conclusions about DANG can we draw from AMZN.

DANG is often referred to as "The Amazon of China." I have frequently disagreed with this label because ecommerce in China is not dominated by one behemoth like AMZN, but instead is split between a number of substantial competitors. DANG probably ranks about third or fourth based on traffic and revenue (coming in behind such non-listed names as Taobao and 360Buy.com). The reason that Wall Street refers to DANG as the Amazon of China is that we don't really have any other U.S.-listed alternative, so we are stuck playing with the third- or fourth-place player. In the competitive world of ecommerce, there is likely to be no prize for coming in fourth.

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On Monday, as DANG was still ripping higher on the back of the surge in RenRen (RENN), I decided to go short DANG at a price of $8.21, and I expect to stay short through earnings (which are due out shortly) because all signs point to a very disappointing fourth quarter. I believe this will take the stock back below $6, which incidentally is where Wall Street analysts already have a share price target for the stock. The stock currently trades at about $7. At the extreme I see DANG trading back at around $5, where it was a few weeks ago.

In early November (before the recent run up) DANG was still trading above $6, but a "surprise" earnings disappointment caused the stock to drop 27% to around $4.40 over the period of about two weeks. Revenue grew substantially as expected, but the net loss was significantly larger than expected at around $12 million for the quarter.

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