DDL - Dingdong Q2 Preview: Results Could Be Below Expectations

2023-08-01 11:46:12 ET

Summary

• Dingdong (Cayman) Limited's Q2 2023 results might fall short of analyst expectations, as I think it is too optimistic to expect sequential revenue growth and positive normalized earnings.
• But Dingdong's shares are already pretty cheap, so this limits the downside for the stock in the event of an earnings miss.
• I still have a Hold rating assigned to Dingdong based on my analysis of the company's near-term financial outlook and its valuations.

Elevator Pitch

My investment rating for Dingdong (Cayman) Limited ( DDL ) shares remains as a Hold. With my previous write-up for DDL published on May 16, 2023, I reviewed the company's financial performance in the first quarter of the year.

I turn my attention to the preview of Dingdong's Q2 2023 financial ( currently expected on August 11) results in this latest update. DDL's new strategy and a change in Chinese consumers' spending habits & patterns post-COVID imply that the company's second quarter financial performance could be below expectations. On the flip side, Dingdong stock is already trading at depressed valuations, so the share price pullback relating to a potential Q2 miss might be limited. Therefore, I continue to view Dingdong's shares as deserving of a Hold rating.

The Sell Side Expects Sequential Revenue Growth And Positive Earnings In Q2

Dingdong is likely to release the company's second quarter results in the second week of August based on its past earnings announcements, even though DDL hasn't disclosed the exact date for its upcoming quarterly results report.

The market predicts that DDL will have registered QoQ top line expansion and positive normalized net profit in the second quarter of 2023.

Specifically, Dingdong's revenue is projected to increase by +1.4% QoQ from RMB4,997.5 million in the first quarter of this year to RMB5,067.0 million for the most recent quarter, based on consensus financial data taken from S&P Capital IQ . With regards to the bottom line, the sell side anticipates that the non-GAAP adjusted net income attributable to shareholders for DDL will grow by +50.0% QoQ from RMB4 million for Q1 2023 to RMB6 million in Q2 2023.

In my prior mid-May article for Dingdong, I mentioned that DDL's actual Q1 2023 top line expansion and net operating loss came in lower than what the market was expecting. In the subsequent section, I assess whether Dingdong's second quarter financial performance will be a positive surprise or a disappointment for the analysts.

My Bet Is That Analysts Might Be Disappointed By DDL's Second Quarter Results

I am of the opinion that Dingdong's Q2 2023 earnings release next week or thereafter could potentially surprise the analysts in a negative way.

In my view, the sell side is still too optimistic about DDL's near term financial outlook. I think that Dingdong could possibly have recorded revenue contraction in QoQ terms and a normalized net loss in the second quarter of the current year.

With respect to the top line, DDL's actual revenue for Q2 2023 might fall short of expectations due to the changes in Chinese consumer behavior and the company's business strategy.

A July 6, 2023, commentary piece published on Project Syndicate highlighted that "Chinese have been traveling, socializing, and dining out more" following the end of China's COVID-zero policy late last year. It is fair to assume that demand for Dingdong's fresh grocery e-commerce services in China has shrunk meaningfully since the start of this year, as Chinese in general spend less time at home.

Separately, Dingdong revealed at its Q1 2023 earnings call in May that "we shifted our operational strategy to focus on developing quality products and building user mind share for long-term growth", which it acknowledged could "have affected the growth of order volume temporarily." Any company that wishes to tweak its revenue model will inevitably have to suffer "short term pain" in exchange for "long term gains", and DDL won't be an exception. The "price" that Dingdong has to pay with regards to its business model optimization is likely to be weaker sales in the very near term.

When it comes to Dingdong's profitability, the company's actual second quarter bottom line could have been negatively affected by operating leverage and investments.

As mentioned earlier, Dingdong's top line performance is most probably going to be much weaker than what one would expect. Slower or negative revenue growth translates into negative operating leverage, as DDL's bottom line continues to be hit by a similar level of high fixed costs despite recording weaker sales.

Also, DDL's revenue model optimization as highlighted above will require additional investments from the company, and this will hurt the company's profitability. At the company's first quarter results briefing, Dingdong disclosed that it plans to invest in "deepening our upstream engagement for fresh grocery products," "non-fresh grocery categories," and "infrastructure such as food R&D and agriculture technology" as part of its growth plans.

In summary, my prediction is that Dingdong's second quarter financial results will miss the sell-side analysts' expectations.

Dingdong's Depressed Valuations Limit The Downside Relating To Potential Q2 Miss

In the preceding section, I explained why I think that DDL's Q2 2023 financial performance will disappoint the market.

However, the downside for Dingdong's shares might not be significant, even though the market could react negatively to DDL's potential second quarter results miss. This is because DDL's current valuations are already pretty depressed.

Dingdong is currently valued by the market at consensus forward fiscal 2025 price-to-sales, EV/EBITDA, and normalized P/E multiples of 0.17 times, 1.6 times, and 7.3 times (source: S&P Capital IQ ), respectively.

Concluding Thoughts

DDL's valuations are appealing, but it isn't worthy of a Buy rating. There aren't visible re-rating catalysts for the stock, as Dingdong's Q2 2023 results might be weaker than expected. As such, I keep my Hold rating for Dingdong unchanged.

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