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ADS

This Stock Could Double in 2016

As you can see, business has been booming.

The importance of the EP Platform

If you go to the first chart from above, you'll see that though revenue has been growing at breakneck speed, EPS actually dipped from about $1.84 last year, to $1.23 over the past twelve months. That leaves today's shares trading hands for about 23 times trailing earnings.

The culprit has to do with the company's most important division: the EP Platform. Let's dig into why it's so important.

Bin Li realized that competition in the Chinese Internet market was heating up for auto sales. The first-mover status that the company enjoyed wouldn't last forever if deeper-pocketed rivals started encroaching on Bitauto's territory.

So he went and made his service a whole lot stickier. Now, an auto dealer would have to go through a ton of pain to switch away from Bitauto. The company's platform hosts the virtual showrooms on which dealers rely to draw in customers. And Bitauto provides financing and transaction services as well, making for a convenient and streamlined process in enticing buyers to make a purchase.

Beyond the high switching costs that provide the moat, Bitauto also benefits from the network effect: The more dealers that use Bitauto's services, the more customers that will flock to the site, which entices even more dealers to the site, and so on.

Other companies have been impressed: U.S.-based AutoTrader.com owned 15% of shares outstanding when Bitauto submitted its latest annual report. And a potential rival in Chinese powerhouse JD.com decided that if you can't (or don't want to spend the time and energy) beat them, you should join them. JD's investment in Bitauto now makes the company holders of 26.1% of Bitauto's shares outstanding.

Why the stock is a steal

But Wall Street doesn't seem too enamored with the stock right now. Shares are down 67% since reaching highs in January. This has a lot to do with the fact that EPS have shrunk substantially since the first quarter of 2015. The reason: investments in the EP Platform and the company's infrastructure.

Said Bin Li back then :

In the quarters ahead, we will continue to execute on our three core business strategies: First, we will expand the range of value-added services on our EP platform, including our automobile transactions, CRM and automotive financing services. Second, we will heavily invest in our online/offline service infrastructure to create an even better automobile buying experience. Finally, we will continue to invest in the Bitauto brand, with an emphasis on our mobile offerings. We are confident that these strategies will further solidify our industry leadership.

It's worth noting that beyond concerns about spending on internal investments, Wall Street may have been spooked by the summer swoon in the Chinese stock market, and the concurrent dip in auto purchasing in the country.

But at today's prices, I simply think there's far too much short-term-itis and pessimism baked into the stock. Bitauto is forgoing easy money in the short run to make it a dominant force for decades to come. The company is run by its founder, who clearly still has both skin and his soul in the game.

The Chinese economy -- and its stock market -- will go through fits and starts, but in the end, there's a good chance that there'll be well over 25 million car purchases per year by 2020. Bitauto -- more than any other company -- is unique positioned to benefit from the trend. So I plan on buying more shares and holding them well beyond the end of 2016.

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The article This Stock Could Double in 2016 originally appeared on Fool.com.

Brian Stoffel owns shares of Bitauto Holdings Limited (ADS) and E-Commerce China Dangdang. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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