The ongoing price war between DANG and its competitors has been well publicized in the Chinese press, so why this came as a surprise to anyone (especially Wall Street analysts) is a mystery to me. The Chinese press continues to note the price war, and consumers continue to celebrate the discounts with joy. So once again, it is very easy to predict substantial revenue growth for DANG and an even larger loss than last quarter.
Given the early onset of Chinese New Year, I am expecting that DANG could even hit its first quarter ever of achieving 1 billion RMB (about $160 million) in revenue. Yet I expect the net loss will easily exceed 100 million RMB. If there is one thing to be learned from the AMZN earnings miss, it is that revenues don't matter -- profits do.
DANG's loss will be mostly due to the ongoing price wars, but will also be due to the ongoing build-out of logistics facilities that DANG is undertaking. This is also frequently mentioned in the Chinese press and will be a significant contributor to DANG's Q4 loss. AMZN has cited similar plans that are expected to lead to a Q1 loss for the company.
So how does AMZN compare to DANG? In the table below I assume that DANG will have its first ever 1 billon RMB quarter in Q4.The conclusions from this comparison are fairly obvious. DANG is still a tiny player in this space, doing less than 1% of the revenue of AMZN. Even AMZN only squeaks by with a 1.3% profit margin, while DANG is still experiencing very substantial losses relative to sales. AMZN is growing revenue at a scorching 35%, while DANG is only logging 12%. Yet DANG has seen its stock run up by 67% this year vs. AMZN's 2% due to a simple resurgence in investor preference for all things related to China Internet plays. Many investors hold DANG because they see it as having the potential to be China's ecommerce giant like AMZN is in the U.S. This may eventually come to pass, but even if DANG can make that type of progress it is obviously quite a few years away. So an investment in DANG needs to be considered on a four- to five-year timeframe at a minimum. In the meantime, Wall Street will continue to judge DANG on a quarter-by-quarter basis.
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