Buy, Sell, or Hold: E-Commerce China Dangdang?

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It may have a funny-sounding name, but E-Commerce China Dangdang (NAS: DANG) also has many fans. The stock has recently been a favorite on Wall Street, with analysts speculating that it may become the Amazon (NAS: AMZN) of China -- an alluring possibility indeed!

It's always good to look at a company from as many angles as possible, though, so let's delve into reasons you might want to buy, sell, or hold the stock.

Buy
As with many China-based companies, China itself is a major factor in many investors' purchase decisions. With an immense, growing, and developing population, it's teeming with consumers and future consumers. Thus it appears to offer rosy prospects to retailers such as Dangdang.

A quick glance at the company's income statements is also encouraging, reflecting rapidly growing revenue, rising from 766 million CNY (Chinese yuan) in 2008 to 1.4 billion in 2009, 2.3 billion in 2010, and 3.1 billion over the past 12 months. (Note that 3.1 billion yuan is roughly equal to $500 million.)

The company's strategy also has appeal. Like Amazon, it began selling books and, like Amazon, it's aiming to significantly broaden the scope of its offerings. Its efforts in that direction so far have helped boost the average order size, which was recently about $13, with the number of orders recently surging 32% over year-ago levels. It may also have drawn new customers, as they now number 5.5 million, up 36% over last year.

And then there are the short-sellers. At the end of 2011, 18% of Dangdang's stock was sold short -- i.e. had investors betting against it. This is appealing to those bullish on the company because if the stock rises strongly, that can lead to a "short squeeze" in which worried and money-losing short-sellers cover their positions by buying shares, thereby sending the stock price up even higher.

Sell
The stock debuted a little over a year ago, opening at $24.50 per share. The fact that it has recently been trading near $7 reflects deflated enthusiasm for the company's prospects. Supporting that is its one-star rating (out of a possible five) in our CAPS community.

A closer look at its income statement and other documents reveals plenty of red flags. For starters, though revenue has indeed been rising, net income has morphed into net losses. The stock's share count, meanwhile, has more than tripled in just a few years, significantly shrinking the value of early investors' shares.

Remember Dangdang's plan to offer much more than just books? Well that has a downside, too, as it's likely to put pressure on profit margins. Amazon, too, has seen its profit margins shrink, such as via its popular Kindle, which some estimate is costing the company as much as $50 per unit sold. But Amazon.com seems to know what it's doing, as Kindle sales can lead to boosted sales of books, videos, and other Kindle-related items.

Competition is another concern. Google, for example, would love to be a big player in China, and it's not necessarily dreaming of being a big traditional search engine first. It competes with search leader Baidu (NAS: BIDU) , but it can also give Dangdang some trouble, as it's launching an Android comparison-shopping app for China.

Hold
Given all the considerations above, you might prefer to hold, while you watch and wait to see if Dangdang delivers more promising results. That's a good strategy with other China-based stocks that have been investor darlings lately. Renren (NAS: RENN) , for example, is similar to Dangdang in that it's referred to as the Chinese version of Facebook. It shrank by more than 80% during 2011 and while it's growing briskly, it's also seeing its costs grow significantly, and is spending aggressively on marketing to fuel its growth. SINA (NAS: SINA) , which runs the Twitter-like microblogging Weibo service in China, is down 21% over the past year, and some worry that government crackdowns will hurt it, as when users were recently required to register their real names. China offers much possibility, but also significant risk.

The verdict
As for me, I think I'll pass on Dangdang. While the stock does have potential, I prefer to look elsewhere in the tech sphere. Thankfully, the Fool recently compiled a report detailing its stock pitch to win in The Next Trillion Dollar Revolution. If you want to learn more about this stock primed to benefit from this big-ticket trend, click here to access your free copy today.

At the time this article was published Longtime Fool contributorSelena Maranjianowns shares of Google and Amazon.com, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Amazon.com and Google.Motley Fool newsletter serviceshave recommended buying shares of SINA, Google, Amazon.com, and Baidu. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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