E Commerce China Dangdang Inc (ADR) (DANG), Vipshop Holdings Ltd – ADR (VIPS): 2 Long-Term Plays on Chinese E-Commerce

A concept you are most likely familiar with is the slang term “catching a falling knife”–buying a stock that has fallen precipitously in the hopes that share prices will eventually rise.  Unfortunately, falling knives can end up severely cutting into the returns of anybody who tries to grab one.

Well, it seems that our friend, Mr. Market, has decided to punish one Chinese online retailer with the falling-knife syndrome – LightIn TheBox . After the company went public in June, the stock soared; it later plunged an astonishing 50% in only eight days.

LightIn TheBox data by YCharts

Is this a sign that LightIn TheBox has underlying long-term weaknesses in its business model, or is this a market overreaction?  After all, several falling-knife companies deserve to see their stock prices depreciate, so why would LightIn TheBox be an exception?

LightIn TheBox provides investors looking to profit off of China’s e-commerce  trade a comparatively better option than competitor E Commerce China Dangdang Inc (ADR) (NYSE:DANG). However, Vipshop Holdings Ltd – ADR (NYSE:VIPS) might give LightIn TheBox some trouble if management doesn’t continue to innovate and respond to consumer needs.

Consideration #1: LightIn TheBox is profitable and growing

LightInTheBox is a Chinese online retailer that is often nicknamed the Chinese Amazon or eBay. The company derives most of its revenue from — surprise! Europe.  Europe accounted for 61% of LightIn TheBox’s revenue, with North America and South America clocking in at 19%.

Shares soared in the run-up to its first quarterly report as a public company. LightIn TheBox’s unorthodox business model turned the heads of several investors. Expectations were flying sky-high, but those hopes were apparently not to be realized.

The company’s earnings per share of $0.10 topped analyst estimates, but revenue growth of 53% to $72.2 million missed the consensus estimate by about $4 million. LightIn TheBox also downgraded its yearly revenue estimate, but enjoyed a whopping 140% user increase.

So let me get this straight. You have a profitable, growing online-retail company that has an advantageous market position and hundreds of thousands of consumers doing business with it…and the stock gets annihilated on the day of a quarterly report that missed one statistical expectation by $4 million?  Doesn’t seem to make much sense when you compare LightIn TheBox’s profitability with E Commerce China Dangdang Inc (ADR) (NYSE:DANG)’s current inability to dig itself out of a negative revenue hole.