Elevator Pitch
My investment rating for Dada Nexus Limited (NASDAQ:DADA) stock remains as a Hold.
I discussed about DADA’s collaboration with Chinese short-form video platform Douyin and Dada Nexus’ full-year outlook in my prior March 21, 2023 article. Following an evaluation of DADA’s financial prospects in the short term and the stock’s buybacks and valuation metrics, I determine that a Hold is the most appropriate rating for Dada Nexus.
Q2 Top Line Growth Prospects For DADA
Dada Nexus expects to deliver a revenue of RMB2,900 million for the second quarter of 2023 as per the mid-point of its financial guidance disclosed in its results release.
Assuming that the company’s management turns out to be right about DADA’s Q2 2023 sales, Dada Nexus’ top line is projected to increase by +27.1% YoY in local currency terms for the current quarter. This will also mark the fourth straight quarter running that DADA suffers from YoY revenue growth deceleration. As a comparison, Dada Nexus’ top line rose by +54.7%, +41.1%, +31.9%, and +27.2% for Q2 2022, Q3 2022, Q4 2022 and Q1 2023, respectively in YoY terms.
The sell-side analysts are even more bearish on Dada Nexus’ near-term revenue growth outlook. The current market’s consensus Q2 2023 top line forecast for DADA is RMB2,835 million (source: S&P Capital IQ), which is -2.2% lower as compared to DADA’s management guidance of RMB2,900 million and implies a slower +24.3% YoY growth (versus management guidance of +27.1%). Separately, the analysts’ consensus FY 2023 revenue estimate has been cut by -5.1% from RMB12,727 million at the beginning of this year to RMB12,075 million as of June 5, 2023 as per S&P Capital IQ data.
The company’s management and the sell-side analysts are justified in having a pessimistic view of Dada Nexus’ sales growth prospects in the very near term. Seeking Alpha News reported on May 31, 2023 that China witnessed “the second straight month of contraction in factory activity” in May based on the “official NBS Manufacturing PMI.” Also, DADA acknowledged at its Q1 2023 results call on May 10 that China’s “macro economy and overall consumption are in the gradual process of recovering” as per the company’s observations.
In its FY 2022 20-F filing, Dada Nexus noted that it derives 100% of its sales from China. As such, it is reasonable to assume that a slower-than-expected economic recovery in China will translate into below-expectations revenue growth for DADA.
Dada Nexus’ Second Quarter Breakeven Expectations
At the company’s first quarter results briefing, DADA emphasized that “we are confident that we can realize the breakeven target during the second quarter.” Dada Nexus’ management commentary relating to its profitability expectations are aligned with the analysts’ consensus financial projections. As per S&P Capital IQ data, the sell-side sees DADA turning around from normalized net losses of -RMB396 million in Q2 2022 and -RMB182 million in Q1 2023 to record a non-GAAP adjusted positive net income of +RMB12 million for Q2 2023.
There are two key factors contributing to Dada Nexus’ expected profitability turnaround in the second quarter of this year.
The first factor is the normalization of delivery rider supply. During the worst of the COVID-19 pandemic last year, DADA faced challenges in finding sufficient drivers, which drove up the company’s delivery-related expenses. With the supply of delivery riders increasing following China’s pivot away from its COVID-zero policy, Dada Nexus’ delivery costs have been declining, and this is expected to boost DADA’s bottom line in Q2 2023 and subsequent quarters.
The second factor is DADA’s stronger emphasis on targeting profitability as opposed to achieving maximum volume. Dada Nexus revealed at its Q1 2023 earnings call that it is “doing some work to continue to decrease the subsidies or consumer incentives on a year-over-year basis” for the current year. Lowering subsidies translates into an improvement in profitability on a per order basis.
DADA Didn’t Initiate A New Share Buyback Program Despite Depressed Valuations
In March last year, Dada Nexus announced a $70 million share repurchase plan which will be in effect for a year. DADA eventually spent around $60 million buying back its own shares between March 2022 and the end of the prior year.
DADA’s consensus forward price-to-sales valuation multiple expanded from its all-time trough of 0.50 times in November 2022 to 0.72 times as of June 5, 2023 (source: S&P Capital IQ). But Dada Nexus’ current price-to-sales ratio is still pretty low in absolute terms and way below its historical mean of 3.6 times.
Therefore, it comes as a disappointment that Dada Nexus has yet to initiate a new share buyback program, considering that DADA’s current valuations are still pretty depressed.
Closing Thoughts
DADA’s financial outlook is murky, considering both top line growth moderation and improving profitability. Also, while Dada Nexus’ valuations appear to be undemanding, the company hasn’t indicated its intention to engage in share repurchases again. Taking into account the above-mentioned factors, I don’t find any compelling reasons to either upgrade or downgrade my rating for Dada Nexus. As such, I still rate DADA’s shares as a Hold.
Read the full article here
