Shares of Dingdong (Cayman) (DDL 6.91%) gained as much as 28% on the day of its IPO debut before losing the bulk of those gains in a wild trading session. Now, one problem with investing in China-based American depositary receipts (ADRs) is that their names often don't inspire confidence. Just for the record, Dingdong (Cayman) doesn't sell doorbells in the Cayman Islands. (I wish it did, though!)
Jokes aside, investors are frequently find themselves holding the short end of the stick when buying Chinese ADRs. For starters, almost all such companies incorporate themselves somewhere in an island in the British West Indies, which can free the parent company of liabilities in the event of litigation. What's more, prior instances of malfeasance with companies like Luckin Coffee (LKNC.Y -2.41%) have damaged the reputation of Chinese ADRs on a whole.
Luckily, those aren't the issue with Dingdong. Think of the company as the Instacart of China, but better in some ways. The company operates in 29 cities across China. Users order what they want on the namesake app with no service fees or minimum order size for deliveries. Tips are also not expected. Dingdong makes money solely by charging delivery fees or membership fees for premium services.
The app is well-known in China, and less than 1% of its reviews are negative. After making its customers happy, can the company make investors happy as well?
How do the financials look?
Things are looking good for Dingdong. The company happens to be backed by Japanese conglomerate Softbank, which was also an early investor in Chinese e-commerce giant Alibaba. Dingdong raised $700 million from private-equity firms in April and secured approximately $96 million in new cash with its IPO.
In the first quarter of 2021, revenue grew from $402.8 million in the prior year's quarter to $580.3 million. Meanwhile, its net margin decreased from negative 9.4% to negative 36.4% during the same period -- overshadowing much of its sales growth success.
As mentioned earlier, the company largely relies on low fees and enhanced customer experience to grow its user base in an otherwise hyper-competitive market. That means investors should not expect Dingdong to post any profit for the next few years. It operates a very capital intensive business -- with 110% of its revenue going to cost of goods sold and fulfillment expenses alone.
Is it a safe stock for the long term?
But if we are talking about the long term, the company will need to have some kind of a moat to sustain its growth -- which it has. This is where Dingdong's innovation comes in. It doesn't actually send its personnel into grocery stores to fulfill orders. Instead, the company has constructed over 950 "food warehouses" at the heart of major cities for such purposes.
This saves its employees a lot of time. In fact, it allows consumers to receive their groceries in under 30 minutes after sending their order in from the app -- which is arguably a lot faster than going to the store and picking out things yourself. Keep in mind that the company operates in a country notorious for its endless traffic jams. Most of the population also lives in high-rise apartments (where even getting to the ground floor can be a pain), so the service definitely has a solid value proposition.
Overall, Dingdong stock looks really inexpensive at just 2.6 times price-to-sales for its growth. Moreover, I wouldn't be surprised if the company takes the No. 1 spot in the Chinese online groceries market in the future. For these reasons, I think Dingdong is a solid tech stock you can count on.