Baozun (NASDAQ: BZUN) is often called the "Shopify (NYSE: SHOP) of China" since it uses a similar business model focusing on bringing offline retailers online. Baozun provides retailers with digital storefronts, marketing, customer, fulfillment, and IT services -- making it a "one-stop shop" for digitizing a business.
Baozun's stock rallied nearly 160% this year, but it seemingly stalled out over the past month with a near-10% decline. Many investors likely took profits during that pullback. But I believe that Baozun's best days are still ahead for five simple reasons.
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1. The growth of Chinese e-commerce
China is the second largest economy in the world, but it has an Internet penetration rate of just 52%, compared to 89% in the US and 91% in Japan. Therefore, as incomes rise and more shoppers buy things online, China's e-commerce market will grow.
Goldman Sachs expects Chinese e-commerce sales to rise from $750 billion to $1.7 trillion between 2016 and 2020, which would be almost triple the growth rate of offline sales. That's great news for e-commerce leaders Alibaba (NYSE: BABA) and JD.com (NASDAQ: JD), and could also generate big profits for Baozun.
2. A defensible niche market
In addition to helping businesses digitize their businesses, Baozun helps them set up shop on Alibaba's Tmall and JD.com -- two of the biggest business-to-consumer (B2C) marketplaces in China.
The bears once claimed that Alibaba and JD could simply launch their own first-party platforms to cut Baozun out of the loop. Yet Alibaba is actually one of Baozun's top investors, and Baozun holds partnerships with both Alibaba and JD. This mirrors Amazon's partnership with Shopify, which was only forged after Amazon tried -- and failed -- to lure businesses away with its own Shopify-like service.
3. An evolving business
Baozun is currently expanding its core Shopdog platform, and is investing up to $3 million in its new cloud-based SaaS (software as a service) platform and IT services. Some bears claim that higher investments could crimp Baozun's margins, but these moves should widen its moat while locking in current customers.
In the past, a higher percentage of big brands -- like Starbucks and Nike -- used Baozun's services. But the new SaaS platform, called Nebula, is aimed at providing medium-sized brands with more omnichannel options. That expansion could widen Baozun's customer base and provide it with more data for analytics purposes.
4. Solid growth rates
Last quarter, Baozun's revenue rose 27% annually, and its gross merchandise volume (the total value of all goods processed through its platform) surged 64%. That marked an acceleration from its 21% sales growth and 61% GMV growth in the previous quarter.