Vipshop Surges On Latest Alliances: Is A Turnaround In Store?

Vipshop Holdings Limited (NYSE:VIPS) is set to receive cash investments worth $863 million, per its recent joint agreement with Tencent Holdings Limited and JD.com, Inc (NASDAQ:JD) . Vipshop will join hands with Tencent — one of China’s leading social media companies — and with JD.com, which are included amongst the biggest names in the nation’s e-commerce. Consequently, shares of the company gained a whopping 46% in the pre-market trading session on Dec 18.

Notably, Vipshop has been grappling with soft gross margins thanks to increased promotional spending to stay afloat in a highly competitive online retail scenario. This has been weighing on the bottom-line performance and has been a letdown for investors.

Evidently, this Zacks Rank #4 (Sell) stock has plunged 29% in the past six months against its industry’s 6.9% rally.

However, the bull run witnessed in the pre-market session clearly reflects investors’ renewed optimism, making us hopeful about Vipshop’s prospects.

Let’s delve into the latest announcement and see its implications on this discount retailer.

Expectations From This Alliance

At the close of the transaction and in compliance with the share subscription agreement associated with the deal, Tencent and JD.com will receive a 7% and 5.5% ownership in Vipshop’s Class A ordinary shares, respectively. Further, the subscription is subject to a two-year lock up period during which Tencent and JD.com shall have the rights to appoint a director and an observer to Vipshop’s board.

In addition to share subscription, Tencent and JD.com have agreed to establish cooperative relationships with Vipshop. Notably, Tencent will allow Vipshop utilize traffic from the Weixin Wallet’s interface. Similarly, JD.com will enable Vipshop access its mobile application and Weixin Discovery shopping entry pages. Moreover, JD.com will boost Vipshop’s online business and help it achieve GMV goals. Clearly, the transaction will enhance Vipshop’s online traffic and supplier base.

These strategic deals will bring some of China’s biggest e-commerce and Internet industry names together. Also, the alliance is expected to benefit the three companies and respective customers.

Apart from Vipshop, Tencent and JD.com are also expected to gain from this deal. Incidentally, Vipshop’s sturdy foothold in the e-commerce realm, strong female customer base and flash sale initiatives are likely to be an asset for Tencent and JD.com. Per sources, the deal will enable JD.com and Tencent to better compete with one of their closest industry rivals, Alibaba (NYSE:BABA) .

Further, we expect Vipshop’s latest agreements with Tencent and JD.com to be an important step toward achieving new highs in the online fashion industry. The agreement is expected to bolster Vipshop’s technological capabilities. Following this, the company will be able to provide enhanced online shopping experiences to customers. We expect such efforts to drive Vipshop’s radical business and improve its performance in the long run.

Still Interested in This Space? Check These Hot Picks

Investors interested in the same sector may consider stocks such as Wipro Limited (NYSE:WIT) and Motorola Solutions, Inc. (NYSE:MSI) The stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Wipro Limited delivered an average positive earnings surprise of 10.3% in the trailing four quarters. It has a long-term earnings growth rate of 8%.

Motorola Solutions pulled off an average positive earnings surprise of 13.2% in the trailing four quarters. It has a long-term earnings growth rate of 4.4%.

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