Dingdong Rallies 13.4% Following Q4 Earnings Announcement

The company reported a fourth consecutive profit in last year's fourth quarter, while noting that competition in 2025 will be ‘more intense'

Key Takeaways:

• Dingdong's revenue rose 18.3% in the fourth quarter, as it returned to annual growth in 2024 after a year of contraction
• The company reported a fourth consecutive profit during the quarter as it shifts its focus to the affluent Yangtze Delta area centered on its home base in Shanghai

After returning to revenue growth and ringing up its first-ever profits in 2024, online grocer Dingdong (Cayman) Ltd. signaled that more change is in the air for 2025 as competition in its already-competitive sector heats up even more.

Among other things, the company said it will start working more with partners, marking a departure from its current business model that relies heavily on a self-operated business. The company's latest quarterly report also hinted that after posting profits in each of last year's four quarters, Dingdong might return to the red in the first quarter of 2025.

Life hasn't been easy these last few years for Dingdong, which has struggled to find a sustainable business model since its inception in China's fast-evolving online grocery market. After starting out with an eye to selling basic groceries to people throughout China, the company has been slowly retrenching to focus on its home base in Shanghai and the similarly affluent surrounding Yangtze Delta area in Jiangsu and Zhejiang provinces.

The company has also been trying to build up its business offering its own private label products, as well as customized seasonal products that help to differentiate it from peers and also offer higher margins.

The company's latest remarks that it will start looking for more partnerships also indicates it plans to diversify from its current self-operated business model that offers customers better quality but is also more capital intensive. Bringing on partners would not only lower Dingdong's capital costs but could also leverage those partners' greater expertise in certain product areas where Dingdong has less experience.

"In terms of our business model, we plan to open up key categories for collaboration with our partners. This approach will allow us to leverage the strength of both parties leading to mutually beneficial and successful outcomes," Dingdong founder and CEO Liang Changlin said on the company's earnings call after the release of its latest results on Thursday. "We aim to move beyond the traditional supplier-retailer relationship and foster deeper, more cooperative partnerships where we can support one another effectively."

At the same time, Liang also hinted of some turbulence ahead after the company's banner year in 2024, though he declined to be very specific.

"In 2025, the competition we face will be more intense. And we're also in the process of transitioning from pursuing short-term scale and profitability, so focusing on quality and long-term competitiveness, which may impact us," he said. "Nonetheless, we're confident in the long-term development of the company's business."

Despite that cautionary note, investors welcomed the latest report by bidding up Dingdong's shares by 13.4% in Thursday trade after the announcement. The stock has jumped 160% over the last year, which has become the norm for Chinese tech stocks in a rally dating back to last fall, especially for e-commerce companies.

Even after the rally, Dingdong's stock trades at a relatively low forward price-to-earnings (P/E) ratio of 13, though that's not too far behind the 14 for e-commerce giant Alibaba (BABA). But it's well behind other grocery-oriented e-commerce stocks, such as the 21 for Meituan (3690.US), and the far-higher 58 for U.S. giant Costco (COST) and 37 for Walmart (WMT). That implies there could be more potential upside for the Chinese names as global investors rebalance their portfolios away from a U.S. market that looks increasingly overvalued.

Return to revenue growth

Dingdong has been evolving nearly nonstop these last few years as it looks for a sweet spot that can provide sustainable profits and revenue growth. Its smaller former chief rival Missfresh was making similar efforts but ultimately collapsed after burning cash too rapidly while searching for the right business model. That left Dingdong as China's main online grocer with its own direct operations, different from rivals like Meituan and PDD (PDD) that used a lower-cost model relying heavily on partners.

As Dingdong struggled to compete with those rivals, it retrenched to focus on the Yangtze Delta where consumers are more affluent and willing to pay for its better service and self-developed products. That caused its revenue to contract in 2023 after peaking the previous year, before returning to growth last year under its new focus on wealthier customers.

The company's revenue grew 18.3% in last year's fourth quarter to 5.9 billion yuan ($814 million), while its gross merchandise value (GMV) rose by a similar 18.4% to 6.55 billion yuan. The fact that revenue and GMV are quite similar is no coincidence, and owes to the self-operated model that sees Dingdong mostly sell products directly to consumers. But we can probably expect these two figures to diverge more as Dingdong takes on more partners in the future.

Most of Dingdong's customer-focused metrics also improved in the fourth quarter, reflecting growing loyalty among those customers. Those included a 3.7% increase in average revenue per user (ARPU), and a similar 3% increase in average monthly orders per user.

Notably, the company's fulfillment expenses rose just 9.1% year-on-year during the latest quarter, about half the rate of revenue growth, as it built out a network of "frontline fulfillment stations" that are both more efficient and allow for quicker order fulfillment. That helped to raise the company's operating margin to 1.1% in the fourth quarter from negative 0.4% a year earlier, though we should point out that level is still below the 3.5% for Costco and 2.0% for U.S. grocery giant Kroger (KR).

The improved margin helped Dingdong to post 91.6 million yuan profit for the quarter, reversing a 4.4 million yuan loss a year earlier, as it reported its sixth consecutive quarter of positive cash flow. But as we noted earlier, the company hinted it could fall back into the red in the current first quarter, stating in its guidance that it aims to "achieve non-GAAP profits" in the first quarter of 2025. That's different from the previous quarterly report, when it said it was looking to achieve both GAAP and non-GAAP profits in the upcoming quarter.

Investors don't seem too worried about a dip back into the red, probably because such a drop would be due to non-operational one-time factors. But the overall cautionary tone for 2025 in general could be more cause for concern.