Can Dangdang Keep It Up?

Can Dangdang Keep It Up?

Shares of E-Commerce China Dangdang were among last week's biggest winners, moving 10% higher after slipping in recent weeks.

It's been a roller-coaster ride for investors.

The Chinese online retailer traded as low as $3.70 in April, more than tripling four months later to peak at $12 in early August. Then came the drop. Just 13 trading days later, the stock had fallen 36% to bottom out at $7.68.

September has been kinder, and Dangdang shares have been bouncing back into favor.

It's probably not a coincidence that the stock bottomed out the day that JPMorgan Chase downgraded the stock late last month. It isn't the first time that Wall Street was either too early or too late in making a call.

However, now that Dangdang has started to bounce back, can it stick?

One thing that's been holding Dangdang back is its lack of profitability. Its latest quarter was generally solid. Revenue climbed 24%, ahead of expectations. The online retailer's deficit narrowed to $0.13 a share, and that too was better than the pros were expecting.

Another stumbling block has been that Dangdang -- as China's leading bookseller these days -- relies too heavily on low-priced books to drive its business. The e-tailer served 15 million orders during the quarter, but divide that tally into its $243.3 million in revenue and you find Dangdang generating a little more than $16 in revenue per order.

That's actually a big improvement from the $12 revenue per order that it was averaging at the time of its IPO three years ago, and higher-priced general merchandise continues to grow faster than its original media business. However, until Dangdang turns consistently profitable it will be dogged by naysayers wondering if the fast-growing Internet retailer will ever turn a profit.

It's not as if being in the black is everything when it comes to Chinese e-tailers. LightInTheBox and Vipshop are both profitable, but both stocks stumbled this summer after providing weak revenue outlooks. At least, Dangdang can argue that it bested expectations on that front with its forecast for the current quarter landing just above where the pros were perched.

The comparisons to LightInTheBox and Vipshop aren't entirely fair. LightInTheBox is based out of China, but more than 80% of its sales are to Europe and North America. Vipshop runs a popular flash sales website where higher margins are possible. However, since Dangdang is no longer the only China-based company with an e-tail bent to be publicly traded, it better get used to being pitted against the faster-growing and profitable LightInTheBox and Vipshop.

Dangdang is doing all of the right things by continuing to grow and with net margins improving. Now it needs to put it all together and give the market the profitable company that growth investors want to invest in these days.

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Longtime Fool contributor Rick Munarriz owns shares of LightInThe Box Holding. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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