E Commerce China Dangdang Inc (ADR) (NYSE:DANG)’s revenue from sales of other merchandise rose 12% to $66.3 million, accounting for 31% of the company’s top line. Investors have noticed Dangdang’s improving numbers, and its shares have risen 55% over the past twelve months. However, until the company can actually produce a profit, much of this growth is speculative without concrete fundamentals.
An increasingly crowded market
Although Vipshop and Dangdang’s growth has been encouraging, investors should remember that the two companies are tiny players in a massive market, as seen in the following chart.
Yet in the end, there will be an inevitable market consolidation in which Tmall or 360Buy could buy out (or wipe out) the rest of the competition.
However, there is one company notably missing out on the party – Internet giant Baidu.com, Inc. (ADR) (NASDAQ:BIDU), commonly referred to as the “Google Inc (NASDAQ:GOOG) of China”. In theory, Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s 81.6% share of the search market should have granted it a valuable competitive edge in the e-commerce market.
However, Baidu fell flat on its face last year when it closed its e-commerce site, Lekutian, after only two years on the market. Lekutian was a joint venture with Japanese e-commerce leader Rakuten, and fell apart after the Chinese and Japanese management teams failed to agree on the future direction of the company. Drawing users away from Tmall and 360buy also proved too difficult a task, especially when both companies had already established considerable brand loyalty among shoppers. Lekutian was Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s second e-commerce initiative, after its first attempt, Baidu Youa, failed in a similar manner.
I believe that at some point in the future, Baidu could start buying up some of the smaller e-commerce sites, such as Vipshop and Dangdang, to finally claim a piece of the rapidly growing B2C market. Baidu has a cash hoard of $5.4 billion, which is more than enough to acquire both Vipshop and Dangdang, which respectively have market values of $2.04 billion and $1.05 billion. Acquiring these businesses could finally help Baidu reverse its slowing year-on-year top and bottom line growth over the past several quarters.
The Foolish Bottom Line
In closing, Vipshop Holdings Ltd – ADR (NYSE:VIPS) and E Commerce China Dangdang Inc (ADR) (NYSE:DANG) are still speculative, risky investments. However, I believe that their improving user numbers, rising top and bottom line growth, and resilience in a market dominated by two major players prove that they could keep growing over the next few years. In addition, their small size means that there could be a lot more upside for both stocks, especially if major Chinese Internet companies like Baidu, Tencent or Sohu get more interested in expanding across the e-commerce industry.
The article A Pair of Underdogs in China’s Bustling E-Commerce Industry originally appeared on Fool.com and is written by Leo Sun.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Baidu. The Motley Fool owns shares of Baidu. Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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