4 New Catalysts For Secoo Ltd.

On Oct. 11, Chinese luxury e-tailer Secoo (NASDAQ: SECO) hit an all-time low of $6.61 per share, representing a near-50% discount from its IPO price of $13. The stock subsequently rebounded 25%, but shell-shocked investors likely expect that rally to fizzle out.

However, IDG Capital, which holds an 18.5% stake in Secoo, recently announced that it had no plans to sell its shares because the company had "just started out." In a recent interview with SINA, IDG Capital Partner Jeacy Yan discussed four key catalysts which could help Secoo's stock recover over the long term.

1. Competitive threats are overstated

A common bearish argument against Secoo is that bigger business-to-consumer marketplaces, like Alibaba's (NYSE: BABA) Tmall and JD.com (NASDAQ: JD), will render Secoo obsolete as they sell more luxury goods.

Tmall recently introduced a "luxury pavilion" storefront for its high-end brands. JD invested in luxury e-tailer Farfetch, and recently launched a luxury goods platform called Toplife.

However, Yan notes that Tmall and JD.com started selling luxury goods two years ago, and that they still haven't throttled Secoo's growth. Secoo still has 15.1 million registered members and a 25% share of China's online market for luxury brands, so it could have carved out a defensible niche between those top e-tailers.

Secoo, which holds distribution partnerships with top brands like Versace and Ferragamo, also likely benefited from the ongoing problems with counterfeit goods at other major online marketplaces. Yan notes that those partnerships give Secoo better "control" over its supply chains than larger online marketplaces, which often resell products from third-party companies.

2. A brick-and-mortar expansion into smaller cities

Secoo is aggressively expanding into second, third, and fourth-tier cities, which have rising income levels but are often ignored by luxury brands and big e-tailers. Yan pointed out that Secoo already opened five brick-and-mortar stores, and that it will open five more by the end of the year.

Yan claims that Secoo's new flagship stores "will become lifestyle experience centers" that showcase high-end consumer goods, home furnishings, and other products that can be purchased through Secoo's mobile app. That lightweight setup could allow Secoo to quickly expand its brand presence without stocking any inventory.

3. It's predicting what shoppers want

Secoo also lets Chinese tech giant Tencent (NASDAQOTH: TCEHY) analyze its customer data to profile its customers. In addition to figuring out which types of people buy certain luxury goods, its integration with Tencent's social media ecosystem allows Secoo to "know what kind of videos they watch, what kind of articles they read, and who they follow online," according to Yan.

Secoo uses that data to customize a shopper's experience in its mobile app. It also uses analytics in some in-store displays, which makes recommendations based on prior purchases.

4. Rising profits and expanding margins

Yan blamed Secoo's post-IPO decline on hedge funds with "short-term" views, emphasizing that IDG is a "long-term" fund that "will hold the shares for a long period of time and continue to invest in the company's value."

Yan noted that Secoo reported profits for three straight quarters, and that "with a few more profitable quarters," coupled with open communication with investors, "the company will see the stock price gradually recover."

The numbers support Yan's bullish claims. Secoo's revenue rose 30% annually in the first half of the year, its GMV (gross merchandise volume) surged 51%, and it reported a net profit of 52 milion yuan ($7.9 million) -- up from a loss in the prior year quarter.

The key takeaways

IDG could just be propping up a losing investment, but its arguments are based in reality. If Alibaba and JD were really huge threats, Secoo probably wouldn't be posting double-digit annual sales growth and rising profits. Its multi-pronged expansion into brick-and-mortar stores and data-driven mobile sales could further widen its moat against those potential rivals.

Secoo is still a speculative bet. But with the stock trading below 1 times last year's sales, I believe that the potential rewards clearly outweigh the near-term risks.

10 stocks we like better than Secoo Holding Limited-ADRWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Secoo Holding Limited-ADR wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of October 9, 2017

Leo Sun owns shares of Secoo Holding Limited-ADR, Tencent, and Sina. The Motley Fool owns shares of and recommends JD.com. The Motley Fool recommends Sina. The Motley Fool has a disclosure policy.