Secoo's Blockchain Pop: A Lesson in Market Hype

Shares of Secoo (NASDAQ: SECO) soared as much as 42% on Jan. 12 after the Chinese e-commerce company disclosed some plans concerning its "blockchain initiative." But after the initial pop faded, Secoo's stock plunged and finished the day with less than a 2% gain.

Secoo didn't issue an official press release about the news. Instead, a single report -- circulated on Chinese portal sites SINA and Sohu -- claimed that Secoo would use blockchain to improve its transactions. Secoo then confirmed that there were "plans" to use blockchain tech, but that it would announce any major developments in official press releases.

Simply put, Secoo didn't deserve to soar more than 40% on vague blockchain chatter, and investors who chased that rally got burned at the end of the day. Let's take a look at the market hype surrounding blockchain, and whether or not Secoo is a decent investment on its own.

A lesson in blockchain and market hype

Blockchain is the distributed ledger technology that powers bitcoin and other cryptocurrencies. Thanks to the ongoing rally (or bubble) in cryptocurrency prices, any mention of "blockchain" generates tremendous hype -- even if it's undeserved.

Last October, failed medical device maker Bioptix abruptly renamed itself Riot Blockchain (NASDAQ: RIOT), bought mining rigs, and declared that it would pivot into the blockchain and cryptocurrency market. The stock has rallied nearly 160% since that announcement, giving the company -- which generated just $24,000 in revenues from an animal health licensing agreement last quarter -- a market cap of over $200 million.

Earlier this month, Kodak (NYSE: KODK) shares surged by nearly 320% within two days after the company revealed a licensed bitcoin miner rental program at CES. However, the stock started sliding after critics questioned the fuzzy math behind Kodak's promise of generating "approximate" monthly returns of $375 per miner over a two-year period. Many other washed-up companies adopted similar strategies, which resulted in short-term pops dominated by traders instead of long-term investors.

Does Secoo actually need blockchain?

Companies like Riot and Kodak make it hard to take any blockchain buzz seriously. After all, most "serious" investors in blockchain's long-term uses in improving artificial intelligence, logistics, and financial transactions would likely stick with a market leader like IBM (NYSE: IBM).

However, blockchain would still be a valuable tool for retailers like Secoo. Blockchain is simply a decentralized log of data which is spread across various locations. That data is secured in encrypted "blocks", which are accessed through a peer-to-peer network.

For example, Wal-Mart once showcased the use of IBM's blockchain technology to track the condition and origin of its food products in 2.2 seconds -- a process which would have taken nearly a week with traditional tracking methods.

This kind of next-gen tracking system would be invaluable for a luxury e-tailer like Secoo, which needs to keep counterfeit goods out of its marketplace. A blockchain system could also streamline Secoo's logistics, as IBM did with shipping company Maersk last year.

But here's the catch...

Unlike Riot or Kodak, Secoo's core business is growing on its own. The company controls about 25% of the country's online market for luxury goods according to Frost & Sullivan, making it the top stand-alone luxury e-tailer in the country.

Its gross merchandise volume surged 65% annually to $209.6 million last quarter, while its total revenues rose 44% to $147.6 million. On the bottom line, its non-GAAP net income grew more than tenfold to $6 million, while its GAAP net income surged 903% to $5.1 million. For the current quarter, Secoo anticipates 42%-54% annual sales growth.

Secoo's headline numbers look great, but the stock still trades more than 20% below its IPO price due to the belief that bigger marketplaces -- like Alibaba's Tmall and JD.com -- could render it obsolete. Its profitability is improving, but any rising expenses -- from marketing campaigns, new partnerships, or blockchain investments -- could cause its bottom line to drop back into the red.

The key takeaway

Investors should take Secoo's blockchain news with a grain of salt. The short-lived pop gave investors a rare chance to take some profits, but it probably won't lead to any sustainable returns until Secoo releases some official news.

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Leo Sun owns shares of Sina. The Motley Fool owns shares of and recommends JD.com. The Motley Fool recommends Sina and Sohu.com. The Motley Fool has a disclosure policy.