RERE - ATRenew Reported Very Sound Q3 Earnings But The Stock Remains Undervalued

2023-11-22 18:02:40 ET

Summary

• ATRenew Inc. reported strong quarterly earnings, with a 28.4% increase in total net revenues.
• The company's loss from operations decreased significantly compared to the previous quarter.
• ATRenew's CEO expects continued growth in total revenues and highlights the success of their 1P business and multi-category recycling business.

ATRenew Inc. ( RERE ) has just reported very sound quarterly results . The company's stock has not been doing very well, however. In my view, this is mostly due to the stock market not experiencing its best days, and also the fact that RERE is not a classical "blue chip." But apart from an impressive set of results, there have been plenty of positive developments. So, RERE seems to be quite undervalued. But let me explain this later on in this article.

ATRenew - quarterly earnings

Here is a summary of the company's recent earnings .

• ATRenew's total net revenues increased by a whopping 28.4% to RMB 3,256.8 million, or US $446.4 million, from RMB 2,536.0 million in 3Q 2022.
• The company's loss from operations was RMB 28.1 million, or US$3.8 million, compared to a loss from operations of RMB 110.0 million in 3Q 2022.
• The a djusted non-GAAP income from operations totaled RMB 73.8 million or US$10.1 million, compared to RMB 10.8 million in 3Q 2022.
• The number of consumer products transacted, however, totaled 8.2 million, compared to 8.3 million in the third quarter of 2022.

Let us have a look at the table and graphs below to see how the company is doing.

Source: Prepared by the author based on ATRenew's data.

In my view, the best part of the earnings story is ATRenew's sales history. The company's revenues have been steadily rising for a while.

As concerns ATRenew's GAAP and non-GAAP net profits, these have been quite stable for a few consecutive quarters. But the Q3 2023 GAAP net loss was somewhat lower compared to Q2 2023. So there are some improvements, too.

Since Q2 2022, the company's non-GAAP net profits have been positive.

But let me explain the last set of results as well as the management's outlook for the business.

The market outlook and management's comments

ATRenew's CEO and founder Mr. Kerry Xuefeng Chen has again confirmed the company's positive outlook. For Q4 2023, ATRenew currently expects its total revenues to total between RMB 3,730.0 million and RMB 3,830.0 million.

According to the company's CEO, the 1P business, the one that involves buying recycled goods directly from consumers, is doing well. So, it has been recording a sustainable year-over-year growth rate of over 30% in product sales thanks to stable user demand for recycling and exchanging used items for new ones. The company's multi-category recycling business expanded rapidly as consumers showed great interest in exchanging second-hand luxury goods for cash at AHS Recycle.

Mr. Chen, the company's Chief Financial Officer commented on a non-GAAP income from operations of RMB 73.8 million. This positive result was due to ATRenew's automated quality inspection capabilities. Thanks to improved regional and city-level facilities and logistics, ATRenew's cost efficiency also got better. Also, compared to the same period of 2022, the marketing expenses decreased.

As concerns ATRenew's capital utilization, the company invested in strategic collaborations with manufacturers, and managed its liquidity and stocks. It even allocated USD $4 million for share buybacks this quarter. As of the end of the Q3 2023, ATRenew's cash, cash equivalents, restricted cash, short-term investments, and funds receivable totaled RMB 2.3 billion, which is very reasonable for the company the size of ATRenew. But I will touch on the company's debt and liquidity position later on in this article.

Other news and developments

ATRenew joined Apple's official recycling and trade-in program in the third quarter. According to Mr. Chen, the partnership is gaining traction. ATRenew expects it could eventually add between 1 billion yuan ($138 million) and 1.5 billion yuan in annual sales. That is equal to as much as 15% of its current total.

Moreover, the company has started co-operating with Swappie , a renowned EU second-hand smartphone recycling and sales platform, to market the artificial intelligence self-service cell phone recycling machine solution to land in Sweden. The first 10 self-service cell phone recycling machines have been installed in ICA's stores in Stockholm, Uppsala, Helsingborg, and Malmö, allowing consumers to conveniently recycle their old cell phones.

There were also some positive announcements for the company's business reputation. First, ATRenew announced its recognition by the Reuters Responsible Business Awards 2023 in the Circular Transition category. ATRenew was 'Highly Commended' by 25 expert judges. In other words, the company was recognized for its recycling and sustainability initiatives.

Second, ATRenew has joined the United Nations Global Compact ((UNGC)) initiative, a platform for the development, implementation, and disclosure of responsible business practices. UNGC is the largest sustainability initiative in the world. More than 15,000 companies, including ATRenew and 4,000 non-business signatories operating in more than 160 countries have already joined.

You might argue that these reputational developments do not directly add to the company's profitability. However, sustainability, recycling, and other "green" initiatives are very popular nowadays. And they add to ATRenew's recognition. If the company decides to expand to EU countries or the U.S., for example, it will be very useful for RERE's promotion. It seems to me that given ATRenew's cooperation with Sweden's Swappie and Apple, the company might further expand to other countries and continents.

Fundamental indicators and valuations

In spite of the fact that ATRenew cannot boast a long history of GAAP profitability, it is enjoying very good liquidity.

The same is true of its debt versus cash ratio. The cash levels have been rising since 2020, whilst the debt level has been decreasing.

Source: Seeking Alpha.

Although ATRenew is not a classical blue chip, its stock is very undervalued, especially if we have a look at the company's EV/Sales ratio. Almost all of its valuation indicators suggest undervaluation.

Even after having reported a sound set of results, RERE stock is facing some downside pressure, which is not fair, in my opinion.

So, RERE stock seems to be undervalued.

Risks

Like every business, ATRenew is facing its own risks. First of all, the company cannot boast a long profitability history. Some investors prefer to buy highly stable, dividend-paying, and very large companies. So, RERE might not be an investment for them. Then, ATRenew is a Chinese business, which means it can be affected by deteriorating relations between the U.S. and China.

But I personally see that ATRenew is facing plenty of excellent opportunities, even though a recession is also likely ahead. However, I think that all these risks are already factored into the stock price.

Conclusion

ATRenew Inc. has reported good earnings, announced some strategic partnerships, and also improved its business reputation. In spite of these positive developments, the stock is trading too low in my view, suggesting undervaluation. Although RERE stock might not be a perfect fit for conservative investors, market participants interested in undervalued Chinese companies with growth potential might do well if they buy ATRenew's shares.

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