Dingdong is one to watch in quick-commerce, this investor says

The latest iteration of retail, quick-commerce comes with a lot of promise, with the US IPO this summer of Chinese grocery delivery company Dingdong (Dingdong Stock Quote, Charts, News, Analysts, Financials NYSE:DDL) ushering in some of that hype. So far, the stock has yet to impress, but keep watching, says Kim Bolton, president of Black Swan Dexteritas, who likes the company’s growth potential.

“Dingdong is in q-commerce, or quick commerce. Basically what they do is provide 30-minute delivery services in China and they’re the biggest one out there,” said Bolton, speaking on BNN Bloomberg on Thursday.

“This rapid commerce is growing massively around the world, be it on bikes or on drones, and it’s going to be a massive addressable market out there,” he said.

Helped out by the pandemic, instant or quick commerce is small-basket, super-fast delivery, usually one-hour or less and often featuring individual retail items or, more commonly, grocery where you can order that paprika you’re missing for tonight’s goulash and it’ll arrive before the potatoes are done (maybe).

Often logistics-focused and tech-enabled, q-commerce’s attraction for investors is with the prospect of much higher margins than standard grocery as well as representing a way for smaller, perhaps feistier businesses to eke out a space within the retail landscape that’s not already dominated by Amazon.

As a still-scaling business, Dingdong comes with lots of quarterly losses, exemplified in its third quarter 2021 delivered earlier this month. The company had a 108 per cent increase in gross merchant volume compared to the same quarter a year ago with total revenue up 110 per cent to $960.6 million. But the net loss for the Q3 was a big $312.0 million or $0.96 per share. (All figures in US dollars.)

CEO and Founder Changlin Liang spoke of Chinese prosperity and its impact on citizens’ consumption habits, calling it a momentous era in history.

“In the third quarter, we proactively adjusted our strategic focus to ‘Efficiency first, with due consideration of scale,” Liang said in a November 15 press release. “As such, we rapidly improved efficiency and significantly narrowed our non-GAAP net loss margin. We are confident that we will further reduce the non-GAAP net loss margin substantially in the fourth quarter. We are more optimistic now than we were during the IPO process about our expected profitability timeline.”

On the IPO in late June, Dingdong had to drop its offering size by a full 70 per cent and ended up with a market value of $5.5 billion, raising $95.69 million in the process. Japanese conglomerate Softbank is an investor in Dingdong, putting $330 million in the company earlier this year as part of a $1-billion funding round, leaving Dingdong feeling perhaps less disappointed with the IPO than originally expected. The company ended its most recent quarter with cash and equivalents of $1.06 billion.

“From our perspective, the IPO itself is a milestone and how much money we raised isn’t that essential. We have adequate cash flow and that is our situation,” said Liang in a comment on the IPO.

So far, Dingdong’s share price is lower than where it started, but Bolton projects upside from the current $23 range.

“Dingdong is the biggest player in this market in China and they just reported earnings and they’re up 111 per cent year-over-year and 33 per cent quarter-over-quarter,” Boltong said.

“A warning or disclaimer: it’s volatile. It’s a $5-billion market cap company. But we have a $40 price target and it’s currently trading at around $23 to $24,” he said. “So, buy some here, buy some down closer to $20. I don’t think you’ll see $15, but keep your eye on this one.”

Dingdong says it’s helping to modernize China’s agricultural supply chain using standardization and digital transformation as part of the delivery of goods from rural to urban areas. Over the past 12 months, the company grew its network of fulfillment stations from 711 to 1,375 and the number of average monthly transacting users from 4.8 million to now 10.5 million.

“We will continue to improve our gross margin while further benefiting from our upfront investments in the supply chain, increasing the GMV contribution from our private label brands and in-house products, and optimizing our product mix,” said Le Yu, Dingdong’s Chief Strategy Officer, in the third quarter update.

“In terms of non-GAAP net loss margin, we expect to achieve a greater sequential improvement in the fourth quarter than in the third quarter. In Shanghai, the home of our first operation, we expect our unit economics to reach breakeven in the coming quarter, driving unit economics in the Yangtze Delta region to steadily turn positive in the future,” she said.