The Reasons Behind Dangdang's Roller Coaster 2012

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Less than two weeks ago, we crossed the halfway point for 2012. Checking and worrying about your stocks on a daily basis is never a good idea -- but it's worth checking in with your holdings every six months or so.

When it comes to Chinese Internet stocks, the story has been mixed. Below, I'll explain why Dangdang (NYS: DANG) has beaten the market, but is by no means a sure-fire winner quite yet. Before getting started, though, let's take a look at how the company has fared versus the S&P 500 in 2012.

DANG Total Return Price Chart


DANG Total Return Price data by YCharts

It's been a roller-coaster ride for investors, as shares have doubled, then halved, all within the course of just six months. A look at the story behind the company reveals why there's so much mixed emotion.

CompanyDangdang
American EquivalentAmazon
Market Cap$450 M
P/EN/A
P/FCFN/A
Revenue Growth (mrq)58%
Earnings Growth (mrq)N/A

Source: SEC filings, Yahoo! Finance. N/A = Not available because of negative earnings or free cash flow.

As you can see from the diagram above, there's still a lot of work Dangdang has to do if it wants to one day become to China what Amazon is to North America today. The company has yet to turn a profit or generate positive free cash flow, and it has serious in-house competition from Tencent and Qihoo 360 (NAS: QIHU) .

Despite this, Dangdang's stock is beating the S&P 500 this year, primarily because revenue growth was so encouraging. As fellow Fool Jeremy Phillips pointed out this spring, the fact that Dangdang is so close to the transaction point in Chinese commerce means it is far more likely to make money on its platform. Jeremy even went so far as to put Dangdang in the same company as Baidu (NAS: BIDU) , China's leading search engine.

The announcement of a strategic partnership to sell electronic goods through Dangdang also helped propel the stock.

Dangdang's stock price has been, and will continue to be, closely tied to the strength of the Chinese economy. A soft landing of the country's slowing growth would be good news for Dangdang, but any hint of a crash ahead could send the stock reeling.

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At the time this article was published Fool contributor Brian Stoffel owns shares of Baidu. You can follow him on Twitter, where he goes by TMFStoffel. The Motley Fool owns shares of Baidu. Motley Fool newsletter services have recommended buying shares of Baidu. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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