Why Vipshop plunged today | The Pied Fool

Shares of the Chinese online retailer Vipshop (VIPS -17.55%) were down sharply in Tuesday trading, down 17.2% as of 3:03 p.m. ET.

The company reported earnings this morning, and while the second-quarter numbers beat expectations, which were conservative, estimates for the third quarter may have surprised investors with how weak it was.

It seems the Chinese consumer is still in a frenzy. But are Vipshop shares cheap enough to buy now? You might be surprised.

Guide to a decline

In the second quarter, Vipshop saw a slight decline in revenue from 27.9 billion renminbi in the year-ago quarter to 26.9 billion renminbi ($3.7 billion), down 3.6 percent, but ahead of estimates of $3.11 billion, and earnings per share of about $0.48, down. 7%, but also ahead of estimates around $0.36.

Management appreciated how well the company managed to streamline costs, increasing its gross and operating margins even in a difficult demand environment, while maintaining positive profitability.

However, guidance for the third quarter certainly left a lot to be desired, as management guided for revenue of just 20.5 billion renminbi to 21.6 billion renminbi, down 5% to 10% from the previous quarter . The company did not provide guidance for profitability.

Obviously, a deteriorating top line and no margin guidance is worrying for investors. Management attributed the downward trend to general market conditions, signaling that the Chinese consumer is still locked in a spending slump.

Vipshop: Buy, sell or keep?

Vipshop shares have now lost around 35% of their value this year. And while it looks like investors should be leaving the scene, for those investing in Chinese stocks, its shares look awfully cheap today.

Even in this difficult year, the company generated $590 million in earnings in the first six months of 2024, good for a run rate of $1.18 billion. This is in contrast to Vipshop’s market cap of just $6.3 billion. And what’s also attractive is that Vipshop has a net cash war chest of around $3 billion on its balance sheet, giving Vipshop an enterprise value (EV) of just $3.3 billion .

That gives Vipshop an EV-to-revenue ratio of just 3, which is incredibly cheap. And management is doing what it’s supposed to do, buying back $200 million worth of stock last quarter while authorizing a new $1 billion buyback program.

So, for deep value investors who want to take the risks of investing in China, we recommend that you take a look at Vipshop following its post-earnings decline.