DDL - Dingdong: Still Neutral Considering Both Results And Guidance

2023-11-17 12:00:22 ET

Summary

• Both DDL's Q3 top line and bottom line were lower than the consensus financial forecasts, and there was no new share buyback program announced.
• But I have a favorable opinion of Dingdong's guidance of positive Q4 2023 normalized earnings.
• I still have a Neutral view of DDL as a potential investment candidate, which translates into a Hold rating for the stock.

Elevator Pitch

I maintain my Hold rating on Dingdong (Cayman) Limited ( DDL ) stock.

In my prior August 1, 2023 update for the company, I previewed DDL's financial performance for the second quarter of this year. For the current article, I evaluate Dingdong's latest Q3 2023 financial results.

Dingdong's Q3 results didn't meet analysts' expectations, but it is encouraging to see DDL guide for continued profitability in the fourth quarter. The absence of a share repurchase program also means that DDL is lacking the catalyst needed to re-rate its shares. These factors support my decision to rate Dingdong as a Hold.

DDL's Third Quarter Revenue And Earnings Fell Short Of Expectations

DDL disclosed the company's recent third quarter performance with an announcement issued on November 16, 2023 prior to trading hours.

Both the company's top line and bottom line for the most recent quarter failed to meet the sell-side analysts' expectations. In specific terms, Dingdong's Q3 2023 revenue of RMB5,139.7 was -1.3% lower than the market's consensus sales projection of RMB5,209.5 million, while DDL's non-GAAP adjusted net profit amounting to RMB15.5 million was -10.4% below the RMB17.3 million consensus earnings forecast.

The revenue contraction for Dingdong improved from -27.0% YoY for the second quarter of this year to -13.5% YoY. But DDL's low-teens percentage top line decrease for the latest quarter is still pretty poor in absolute terms, and the company's actual Q3 2023 sales was lower than the consensus estimate as highlighted above.

Dingdong acknowledged in the company's Q3 earnings announcement that Chinese "consumers have demonstrated a heightened interest in offline consumption, and travel activity has significantly increased post COVID-19 pandemic." This helps to explain why DDL's top line has dropped significantly and fell short of expectations in the third quarter. In a nutshell, Dingdong's fresh grocery e-commerce business no longer benefits from the Work-From-Home or WFH tailwinds driven by the pandemic that it witnessed last year.

Separately, it is necessary to recognize Dingdong's expense optimization efforts. DDL's general & administrative costs, fulfillment costs, and product development costs declined by -33.0% YoY, -24.8% YoY and -21.8% YoY, respectively. Dingdong managed to lower these key categories of expenses to a greater degree than its -13.5% top line contraction for the recent quarter.

But the market expected DDL to do much better in terms of cost control, as evidenced by the fact that Dingdong suffered from a substantial -10.4% bottom line miss. Dingdong's profitability was also probably hurt by negative operating leverage, as its actual Q3 top line decline (-13.5%) was worse than the consensus revenue decrease of -12.3%.

But Positive Profitability Guidance Is Likely To Impress Investors

Dingdong's revenue and normalized net income for the third quarter of 2023 came in lower than what the analysts had forecasted as detailed in the previous section.

But a bright spot for DDL was the fact that the company had delivered positive non-GAAP adjusted net profit for four straight quarters running between the fourth quarter of 2022 and the most recent quarter. To make things even better, DDL has guided for "non-GAAP profitability in the fourth quarter and full year 2023" in its latest Q3 results announcement.

The market currently values Dingdong at 0.13 times consensus forward next twelve months' Enterprise Value-to-Revenue (EV/R) and 0.15 times consensus forward next twelve months Price-To-Sales (P/S) as per S&P Capital IQ data. DDL's EV/R and P/S multiples appear to be fair, taking into account the company's consensus FY 2022-2025 top line CAGR of a mere +0.4%.

On the flip side, DDL trades at an undemanding consensus fiscal 2025 normalized P/E multiple of 7.9 times, based on the sell side's consensus forecasts (source: S&P Capital IQ ) that Dingdong's non-GAAP EPS increases from RMB0.23 in FY 2023 to RMB1.91 for FY 2025. In other words, if DDL continues to improve its profitability over time, there is a high probability that investors are willing to award a higher low-teens P/E valuation multiple to DDL in the future which implies potential upside for the company's shares.

Market Is Still Waiting For New Share Repurchase Plan

Dingdong's shares were first listed on the New York Stock Exchange in June 2021 . Since then, the company has only initiated a single $30 million share buyback program which started in December 2021 and expired in December 2022.

DDL has turned profitable in recent quarters and its current valuations are enticing as highlighted in the prior section of this article. These are good reasons for Dingdong to embark on share repurchases which will serve as a positive re-rating catalyst for the stock.

Also, at the end of Q3 2023, Dingdong boasted cash and investments of approximately RMB5,631.8 million or $771.9 million, which exceeds the stock's current market capitalization of $444 million. It would be reasonable for DDL to make an attempt to narrow the valuation discount for its shares by engaging in meaningful share repurchases.

Dingdong's depressed valuations suggest that the market is still waiting for DDL to announce a new buyback plan, before investors will regain confidence in the stock's prospects.

Closing Thoughts

I don't see any compelling reasons to change my Hold rating for Dingdong. While I like DDL's Q4 2023 profitability outlook, I am disappointed by the company's third quarter revenue miss and the absence of a share repurchase plan.

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