DDL - Dingdong: Too Early To Be Bullish

2023-05-16 09:33:37 ET

Summary

• Dingdong (Cayman) Limited's Q1 2023 results were significantly below expectations, which have negative read-throughs for the company's full-year outlook.
• But I have a positive view of Dingdong's long-term prospects, considering the growth potential of the East China region and an improvement in users' order frequency metrics.
• I stick to my Hold rating for Dingdong, as I think it is way too early to turn bullish on the stock.

Elevator Pitch

I continue to rate Dingdong (Cayman) Limited ( DDL ) stock as a Hold.

I noted in my earlier February 14, 2023 article for Dingdong that the company's "2023 revenue outlook isn't favorable." I was proven to be right, with DDL's Q1 2023 results coming in below expectations, which is the subject of the current article.

Dingdong's mid to long-term prospects should be good judging by metrics relating to its user base and its East China market. But 2023 will be a tough year for the company, as seen with its worse-than-expected Q1 results . As such, it is premature to turn positive on DDL now, which means that a Hold rating for Dingdong is justified.

DDL's Q1 2023 Results Were Worse Than Expected

Dingdong reported the company's financial performance for the first quarter of 2023 last Friday on May 12.

Top line for DDL decreased by -8% YoY from RMB5,444 million for Q1 2022 to RMB4,998 million in Q1 2023. Dingdong's first quarter revenue came in -7% lower than the sell-side's consensus sales estimate of RMB5,363 million (source: S&P Capital IQ ). As a comparison, the company had previously registered positive revenue growth rates of +13% YoY and +43% YoY for Q4 2022 and Q1 2022, respectively.

With my prior write-up for DDL published on February 14, I cautioned that "as China reopens, it is inevitable that demand for groceries in the Chinese market will gradually normalize." This is one of the two key factors contributing to Dingdong's top line contraction in the most recent quarter.

The other key factor relates to Dingdong's goal of achieving better profitability for the long run. At the company's Q4 2022 results call on May 13, DDL revealed that it has pivoted away from its "previous strategy of gaining and retaining consumers through subsidies and discounted pricing." The company also disclosed at its most recent quarterly results briefing that it has recently "exited (from) some (Chinese) cities that were not profitable."

In a nutshell, DDL has taken some actions (e.g., exit from specific markets, reduce reliance on discounting, etc.) that have the purpose of boosting the company's medium to long-term profit margins. However, these moves will inevitably come at the expense of near-term top line growth. I am of the view that Dingdong is very likely to suffer from revenue contraction for full-year FY 2023, as the high base in FY 2022 (Work-From-Home tailwinds relating to COVID-19) and its profitability optimization measures will be a significant drag on its top line this year.

As a result of negative operating leverage, Dingdong's actual Q1 2023 operating loss wasn't as narrow as what the market had initially hoped for. DDL reversed from a +RMB52 million operating profit in Q4 2022 to record an operating loss of -RMB50 million for Q1 2023. According to the consensus financial forecasts sourced from S&P Capital IQ , the analysts had previously anticipated that Dingdong will report a much narrower operating loss of -RMB33 million in the first quarter prior to the actual results announcement last week.

Look Beyond 2023

As mentioned in the preceding section, 2023 should be a year of transition for Dingdong as the company struggles with a high base for 2022 and implements initiatives to improve its long term profitability.

But there are metrics which suggest that DDL is well-positioned for market share gains in the intermediate to long term.

A key metric is the quality of DDL's user base. Dingdong highlighted at the company's Q1 2023 earnings call that its "order frequency per user" increased by a significant +13.8% in the recent quarter. While it is inevitable that e-commerce growth in China slows following the country's reopening, it is encouraging to see that Dingdong is attracting more active users which are loyal to DDL's platform, as evidenced by the substantial increase in "order frequency per user."

Another key metric is the Gross Merchandise Volume or GMV growth for Dingdong's East China region. DDL's GMV for the East China region increased by +6.3% YoY in Q1 2023, even though its overall company-wide GMV declined by -6.8% YoY for the recent quarter. This implies that Dingdong still has a long growth runway, with specific markets like East China that are still under-penetrated.

Closing Thoughts

I maintain a Hold investment rating for Dingdong (Cayman) Limited. "Short term pain, long term gain" is the best way to describe DDL's investment case. It will be difficult for Dingdong's shares to perform well this year, considering expectations of a top line contraction for the company in 2023. But Dingdong's growth prospects beyond 2023 appear to be decent, taking into account metrics which indicate that DDL has a high-quality user base and operates in markets with untapped growth potential. In that respect, I think that Dingdong (Cayman) Limited deserves to be rated as a Hold.

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