Dingdong Stock: Cheap For Good Reasons (NYSE:DDL)

Elevator Pitch

I have a Hold investment rating for Dingdong (Cayman) Limited’s (NYSE:DDL) shares.

DDL’s shares have fallen by -89% since its public listing in the middle of 2021, and it currently trades at 0.15 times consensus forward next twelve months’ Enterprise Value-to-Revenue. But Dingdong’s shares don’t warrant a Buy rating, as I think that its poor stock price performance and low valuation multiples are justified by profitability concerns and delisting risks. As such, I think that a Hold rating for Dingdong is more appropriate.

Business Profile

Dingdong calls itself “the leading fresh grocery e-commerce company in China” in the company’s media releases.

As indicated in its FY 2021 20-F filing, DDL earned substantially all of its revenue (or 98.9% to be specific) from “product sales of primarily fresh groceries, prepared food and other food products through ‘Dingdong Fresh’ APP and mini program” last year. Membership fees accounted for the remaining 1.1% of Dingdong’s fiscal 2021 top line.

The company was first established in May 2017, and its shares were listed on the New York Stock Exchange since June 2021.

China’s Approach Towards The Pandemic Has Been A Tailwind For DDL

China has chosen to stick with its COVID-zero policy, unlike many other countries worldwide which have gone ahead with relaxing pandemic restrictions. This is generally negative for companies operating in Mainland China, but Dingdong is an outlier in that respect.

The COVID-zero stance adopted by China implies that there is a higher probability of lockdowns occurring when there is a spike in pandemic cases from time to time. This in turn leads to a higher proportion of people in the country reducing their social activities and spending more time at home, irrespective of whether actual lockdowns have been initiated. As such, demand for groceries in Mainland China has been remained strong despite challenging economic conditions.

Therefore, it shouldn’t come as a surprise that Dingdong still managed to achieve strong top line growth in the first half of the year. As per S&P Capital IQ’s financial data, DDL’s revenue expanded by +43.2% YoY and +42.7% YoY to RMB5.4 billion and RMB6.6 billion for Q1 2022 and Q2 2022, respectively. Recall that Q2 2022 represented the peak of COVID-19 lockdowns in Mainland China, with even key cities like Shanghai and Beijing experiencing lockdowns in that quarter.

More significantly, DDL generated a positive non-GAAP net profit of RMB20.6 billion in the second quarter of 2022 as highlighted in its Q2 financial results press release. This was the first time that Dingdong became profitable since its listing on the NYSE in the middle of last year. At its Q2 2022 earnings briefing on August 11, 2022, Dingdong acknowledged that “the milestone profit we achieved in Q2 was partially a result of the lockdown” in Mainland China.

Dingdong’s Weak Stock Price Performance Is Justified By Multiple Factors

On the surface, there seems to be a significant misalignment between DDL’s 1H 2022 financial results and its share price performance post-IPO.

Dingdong’s last done share price was $2.63 as of October 31, 2022, which is -89% lower than DDL’s June 2021 IPO price of $23.50. During the same period, the S&P 500 has declined by a mere -9%.

However, if one delves deeper, there are actually good reasons why DDL’s shares haven’t performed well since its public listing.

A key reason is that Dingdong’s positive earnings for Q2 2022 appears to be an one-off.

DDL noted at its second quarter results briefing that “looking ahead to Q3, we may expect a slight loss.” S&P Capital IQ’s consensus financial estimates suggest that analysts still expect Dingdong to record a normalized net loss of -RMB23 million for full-year fiscal 2023. An August 17, 2022 Nikkei Asia article mentioned that “about 90% of online grocery delivery services are operating at a loss.” This statistic serves as an indication of how competitive the market is and the difficulty of achieving profitability in this industry.

In the current environment, the market continues to penalize fast-growing companies which are finding it tough to achieve profitability. This helps to explain why DDL’s consensus forward next twelve months’ Enterprise Value-to-Revenue multiple has derated from 2.4 times at its peak in early-November 2021 to 0.15 times as of end-October 2022.

Another key reason is that Dingdong faces the risk of being delisted in the US, and it has yet to officially file for a Hong Kong listing (or any other stock exchange for that matter) to mitigate delisting risks.

On May 10, 2022, DDL filed a 6-K filing disclosing that “was provisionally named by” the SEC “as a Commission-Identified Issuer” following the release of its FY 2021 20-F filing. Dingdong noted specifically that it could be barred “from being traded on a national stock exchange or in the over-the-counter trading market in the United States”, assuming that it “has been identified by the SEC for three consecutive years” as per the Holding Foreign Companies Accountable or HFCA Act.

In late-July 2022, Reuters quoted unnamed sources highlighting that DDL “has started preparations on its dual primary listing in Hong Kong.” Unfortunately, the company hasn’t provided any official updates on this matter in recent months. If the ongoing inspection of the audit records of US-listed Chinese companies doesn’t go as well as hoped for, delisting risks might be in the spotlight again. All else equal, Dingdong has a higher risk profile than its other US-listed Chinese peers which have already secured a secondary or primary listing on another foreign stock exchange.

Closing Thoughts

Dingdong’s shares are rated as a Hold, as I have a mixed view of the stock. On the positive side of things, DDL has delivered robust top line growth in the first half of 2022 thanks to strong grocery demand. On the negative side of things, Dingdong does deserve a valuation discount considering delisting risks and the competitive nature of the Chinese online grocery market.