The stock of Vipshop Holdings (NYSE:VIPS, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $31.19 per share and the market cap of $21.2 billion, Vipshop Holdings stock shows every sign of being significantly overvalued. GF Value for Vipshop Holdings is shown in the chart below.
Because Vipshop Holdings is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 14.4% over the past three years and is estimated to grow 21.07% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Vipshop Holdings has a cash-to-debt ratio of 7.15, which which ranks better than 85% of the companies in the industry of Retail - Cyclical. The overall financial strength of Vipshop Holdings is 8 out of 10, which indicates that the financial strength of Vipshop Holdings is strong. This is the debt and cash of Vipshop Holdings over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Vipshop Holdings has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $15 billion and earnings of $1.259 a share. Its operating margin is 5.79%, which ranks better than 67% of the companies in the industry of Retail - Cyclical. Overall, GuruFocus ranks the profitability of Vipshop Holdings at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Vipshop Holdings over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Vipshop Holdings is 14.4%, which ranks better than 85% of the companies in the industry of Retail - Cyclical. The 3-year average EBITDA growth rate is 13.1%, which ranks in the middle range of the companies in the industry of Retail - Cyclical.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Vipshop Holdings's ROIC is 16.40 while its WACC came in at 4.86. The historical ROIC vs WACC comparison of Vipshop Holdings is shown below:
To conclude, The stock of Vipshop Holdings (NYSE:VIPS, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Retail - Cyclical. To learn more about Vipshop Holdings stock, you can check out its 30-year Financials here.
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