Yahoo Finance Can Vipshop Stock Keep Going After Last Week's 19% Pop?
One of last week's biggest gainers was Vipshop Holdings (NYSE: VIPS), moving 19.4% higher without any major news behind the buying surge. The Chinese online discounter of brand-name apparel announces third-quarter results after Monday's market close, so one can argue that the shares are merely rallying ahead of the financial report. However, recent momentum and the stock's performance last time out suggest that staying on the sidelines could be the more prudent call.
Vipshop stock plummeted 13% the week it posted its second-quarter report three months ago. Revenue rose at a reasonable 30% rate, but adjusted earnings inched a mere 8% higher as cutthroat competition ate away at its previously beefy profit margin. The stock would go on to trade in the single digits for the first time since 2012, and that's just where it remains even after last week's rally.
Image source: Vipshop Holdings.
Waiting is an underrated accessory
Monday afternoon's financial results will naturally decide if last week's gains were warranted. Analysts aren't holding out for much. They see revenue climbing 26% to $2.28 billion, smack dab in the middle of Vipshop's earlier guidance calling for 24% to 28% top-line growth. Even if Vipshop lands at the high-end of that range, it will still be its weakest revenue growth showing as a publicly traded company.
Decelerating revenue growth isn't a deal breaker for investors. Vipshop stock has seen its annual revenue growth rate decrease every year since going public in 2012, and that didn't get in the way of the stock more than doubling in each of its first three years on the market. The real problem with Vipshop is that margins are going the wrong way. Wall Street pros are holding out for a profit of $0.14 a share this time around, less than the $0.15 a share it chimed in with a year earlier.
Margin contraction is what weighed on Vipshop following its disappointing second-quarter performance. Some increase in costs are palatable. Vipshop has been fleshing out its infrastructure with more regional warehouses. It has also invested heavily in a proprietary last-mile delivery network to enhance its fulfillment operations. The market isn't second-guessing Vipshop on those fronts. The real struggle is that competitors have been offering aggressive promotions to drum up sales, and that's forcing Vipshop to follow suit with heavier-than-ideal markdowns.
The increasingly competitive marketplace resulted in Vipshop falling short of analyst profit targets last time out, a rare miss for a company that has historically beaten earnings expectations and blasted through conservative revenue growth guidance.
The stock is seemingly cheap at 14 times this year's profit target and less than 12 times next year's earnings forecast, but analysts have been lowering their bottom-line forecasts in recent months. Anything that nudges Wall Street pros to keep tempering their outlooks would push multiples higher while also questioning Vipshop's status as a growth stock. The stock took a big step up last week, but how Monday afternoon plays out will decide how another likely big move up or down goes on Tuesday.
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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
