Should you buy Onion Global after its failed IPO?
Global Onion (NYSE: OG) was one of the worst tech IPOs of 2021. The Chinese e-commerce company went public at $ 7.25 a share in early May, closed at $ 7 on day one, and is now worth just $ 3.80 about.
Investors’ shift from growth stocks to value stocks amid inflation fears and focus on reopening the games this year, regulatory headwinds for Chinese stocks in China and the United States , and the previous failures of other small Chinese e-commerce companies all cast a dark cloud over Onion’s IPO. A disappointing earnings report earlier this month exacerbated that pressure.
But at its current market cap of a meager $ 340 million, Onion is trading less than once last year’s sales. Are investors too skeptical of Onion’s prospects, or should they continue to avoid this failed IPO?
What does the onion do?
Onion calls itself a “next generation lifestyle brand platform that incubates, markets and distributes the world’s fresh, trendy and future brands to young people in China and across Asia.” Onion’s online platform hosted more than 4,000 brands at the end of 2020. It works directly with 86 partner brands and sells 21 private labels. He draws on an army of over half a million active social media influencers – which he calls KOC (Key Opinion Consumers) – to attract buyers to his platform.
It operates two proprietary markets: O’Mall and CosyFans. O’Mall, who generates most of his income, sells lifestyle products and household items. It is available both as a standalone application and as a mini program in TencentChina’s largest mobile messaging platform, WeChat with 1.24 billion monthly active users. The platform is heavily integrated with videos submitted by KOC, and it encourages users to become KOCs themselves to earn incentives through product recommendations.
CosyFans, which was originally launched in Malaysia, is a smaller platform that sells products from Onion’s partner brands, third-party suppliers, and private labels outside of China. Onion also sells some of its inventory to third-party retailers and last year opened two physical stores, one in China and one in Japan.
How fast does the onion grow?
Onion’s revenue grew 34% to 3.81 billion yuan ($ 584 million) in 2020, and its total order count increased 53% to 15.8 million. Its net income more than doubled to 208 million yuan ($ 32 million), thanks to the continued reduction in execution expenses over the past two years.
But in the first quarter of 2021, Onion’s revenue declined 6% year-on-year to 668.9 million ($ 102 million) as its net profit fell 84% to 8.9 million. yuan ($ 1.4 million).
He attributed these declines to three main challenges. First, it sold fewer cleaning products after the pandemic ended in China. Second, it has struggled to sell more household essentials because consumers stocked too much of these items at the start of the pandemic. Finally, its cross-border sales plummeted as Chinese buyers once again traveled overseas to make “substitute purchases” for domestic buyers who were willing to pay mark-ups. Travel-related disruptions to this practice during the pandemic had generated favorable winds for Onion’s cross-border business.
The company has given no guidance for the remainder of the year, but these headwinds will likely persist over the next several quarters.
Bunion problems are easy to see
As we remove layers of Onion’s business, we’ll spot some significant issues. The onion is much smaller than Ali Baba (NYSE: BABA) and JD.com (NASDAQ: JD), the two largest e-commerce companies in China, but its growth is already much slower.
Analysts expect Alibaba’s revenue to grow 31% this year and JD’s revenue to grow 27%. Neither company cited challenges similar to Onion in their past quarters.
Alibaba and JD marketplaces also make most of their domestic deliveries within 24 hours. It still takes Onion one to four days to fulfill domestic orders and about ten days for overseas orders.
Onion’s KOC platform looks like a layered marketing scheme. Instead of recruiting celebrities on social media, he encourages every shopper to become a KOC and earn a share of every sale he promotes by. buy invitation a senior KOC called O’Partner.
KOCs can become O’Partners after gaining enough subscribers, submitting an application, and then paying a one-time fee of 12,000 yuan ($ 1,856). Each O’Partner can then invite up to 40 more people to become KOCs, collect their invitation fees, and then pay an additional fee to get more invitations.
Onion says these KOCs are the engine of its growth, but its average GMV per KOC on O’Mall fell 15% in 2020. In addition, only 75% of its KOCs were active during the year, down from 78 % in 2019 and 82% in 2018..
These lower engagement rates, along with Onion’s abrupt first-quarter slowdown, indicate that its business will not last longer in China’s fierce e-commerce market. Going public just before releasing those horrific numbers suggests he just wanted to make some quick cash with his IPO.
Buy Alibaba or JD instead
There is little reason to buy Onion when both Alibaba and JD are profitable, have more promising growth prospects, and are trading at reasonable valuations. Like Onion, JD is trading at around once this year’s sales, but he can be valued more accurately with his forward P / E ratio of around 50.
I think the onion is more likely to suffer the same fate as Secoo, Mogu, and other forgotten Chinese e-commerce outsiders who never recovered from their interrupted IPOs – instead of outperforming market leaders in the long run.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.