Goldman Sachs Downgrades Vipshop, Says Other Chinese Internet Picks Hold More Upside Potential

Chinese online discount retailer Vipshop Holdings Ltd – ADR VIPS is likely to suffer margin erosion in the coming quarters as it invests heavily in marketing in a bid to attract new users, according to Goldman Sachs. 

The Analyst

Analyst Ronald Keung downgraded Vipshop from Buy to Neutral and reduced the 12-month price target from $19.20 to $13.10.

The Thesis

Vipshop is facing intense competition on the ground, with likely downside risk to the consensus earnings estimate, Keung said in a Wednesday note.

The underperformance of Vipshop stock relative to the S&P 500 Index since it was added to Goldman's Buy List in March 2014 is due to a slowdown in growth and renewed market concerns over user growth and margin pressure, the analyst said. 

Goldman revised its P/E multiple estimate from 20 times to 15 times on the basis of slower projected earnings and revenue growth beyond 2019. 

The firm increased net revenue estimates for 2018-2020 to account for expected contributions such as the Vipshop WeChat mini program and JD.Com Inc(ADR) JD flagship store. 

Keung trimmed the earnings per ADS estimates for the 2018-2020 period by 6-8 percent due to a lower non-GAAP net profit margin assumption.

"We downgrade Vipshop to Neutral as we see more upside in other China internet companies in our coverage universe," the analyst said. 

The Price Action

Vipshop shares have lost about 8.8 percent year-to-date. The stock was slipping 2.8 pecent to $10.39 at the time of publication Wednesday morning. 

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