Elevator Pitch
I assign a Hold rating to Dada Nexus Limited (NASDAQ:DADA). The focus of my earlier March 28, 2024 article was the company’s financial disclosures for the final quarter of 2023.
The current write-up touches on Dada Nexus’ prospects, user metrics, and shareholder capital return. I stick with a Hold rating for DADA. My view is that it will be a while before one can witness a meaningful improvement in its financial performance, which explains why the stock isn’t a Buy now. On the flip side, I do see positives such as a faster-than-expected pace of buybacks and an improvement in certain user metrics, so I am unwilling to rate this name as a Sell.
Near-Term Financial Outlook Is Negative
DADA’s top line contraction is expected to get worse in subsequent quarters, while the company’s net losses are projected to remain elevated.
According to consensus data obtained from S&P Capital IQ, Dada Nexus’ revenue in local currency or RMB terms is estimated to decrease by -17.9% YoY and -17.2% YoY in Q2 2024 and Q3 2024, respectively. If the analysts are right, DADA’s future top line performance will be worse than its -4.8% sales decline for Q1 2024. Also, the sell side is projecting normalized net losses of -RMB171.0 million and -RMB193.9 million for Dada Nexus in the second quarter and third quarter of this year, respectively. This is comparable with the company’s actual non-GAAP adjusted net loss of -RMB194.8 million for the first quarter of the current year.
The market is justified in having a negative opinion of Dada Nexus’ short-term financial prospects. DADA’s first quarter top line of RMB2,451.8 million was -5.9% lower than the sell-side analysts’ consensus revenue forecast of RMB2,606.1 million as per S&P Capital IQ. On the other hand, the company’s actual Q1 2024 normalized net loss of -RMB194.8 million turned out to be much wider than the market’s consensus bottom line estimate of -RMB166.0 million (source: S&P Capital IQ).
The weakness associated with DADA’s JD NOW business is likely to remain as a drag on the company’s overall financial performance going forward. The JD NOW business segment’s -28.4% YoY revenue contraction in Q1 2024 explains the company’s overall -5.9% revenue miss and -4.8% YoY top line decline for the most recent quarter.
In its Q1 2024 results press release, Dada Nexus describes the JD NOW business as “China’s largest local on-demand retail platforms for retailers and brand owners” and calls the other segment, Dada Now, “a leading local on-demand delivery platform open to merchants.”
The company’s on-demand retail platform has been rebranded from JDDJ or JD Daojia in the past to JD NOW recently. Dada Nexus highlighted at the company’s latest first quarter results briefing that it “recently launched a brand upgrade” for its “on-demand retail service” to be positioned as one “delivering quality goods at top-notch speeds.”
There is a price to pay for the re-positioning and re-branding associated with JD NOW. The company explained in its Q1 results release that JD NOW saw a “decrease in fulfillment service revenues” as a result of the “full rollout of delivery fee waiver program for orders exceeding” RMB29.
Moving forward, DADA’s future financial performance, especially its bottom line, might remain weak because of the planned investments pertaining to JD NOW. At the company’s latest quarterly analyst briefing, DADA stressed that it will proceed with “ongoing investments to enhance user experience, including further upgrades to our fulfillment services and the full rollout of the delivery fee waiver program” for JD NOW.
Improvement In User Metrics And Faster-Than-Expected Pace Of Share Repurchases Are Key Positives
Looking beyond Dada Nexus’ poor Q1 results and lackluster outlook for the quarters ahead, there are positives associated with DADA’s user metrics and capital return.
Although DADA’s short-term financial performance might be unexciting, some of the company’s user metrics could be leading indicators that offer a preview of Dada Nexus’ medium-to-long-term prospects.
Dada Nexus revealed in its Q1 results announcement that JD NOW’s “orders through the JD App” rose by over +70% YoY and +100% YoY for Q1 2024 and April 2024, respectively. The company noted at its most recent quarterly analyst call that JD NOW has become more “focused on integrating into the JD.com ecosystem to drive growth on the JD app” with initiatives like having “a new JD NOW section on the homepage of the JD app.” In other words, DADA appeared to have found initial success in generating higher order volume through the JD App sales channel.
Another metric worthy of attention is that JD NOW’s “Net Promoter Score for the supermarket category” was “7 percentage points” better YoY in the first quarter of this year, as per DADA’s management commentary at the Q1 call. This sends a clear message that JD NOW’s users have become more satisfied following the implementation of initiatives related to its repositioning, like delivery fee waiver.
Separately, Dada Nexus’ actual pace of share repurchases appears to be faster than what was expected initially.
DADA previously announced a $40 million share buyback plan that will be in effect between late-March 2024 and late-March 2026. Assuming that the company completes its buyback program by March 2026 at a steady pace, this will be equivalent to expected quarterly share repurchases of around $5 million.
But Dada Nexus had spent $8.4 million on share repurchases in slightly over a month between late-March this year and April 30, 2024. This seems to suggest that DADA could possibly complete its share repurchase plan in a shorter-than-expected period of time.
If DADA completes the company’s $40 million buyback plan within one year, the stock’s potential buyback yield could be as high as 9.4%. On the other hand, Dada Nexus’ forward buyback yield will be still reasonably attractive at 4.7%, assuming that it spends $20 million (half of its buyback plan) on repurchases in a year.
Concluding Thoughts
I still have a Hold rating for Dada Nexus. DADA is undeserving of a Buy rating for now, as the company will take more time to achieve an improvement in its financial results. On the other hand, there are bright spots relating to the company’s user metrics and buybacks. Also, I deem Dada Nexus’ valuations to be reasonable. The stock’s consensus next twelve months’ price-to-sales ratio of 0.32 times (source: S&P Capital IQ) seems low on an absolute basis. But one needs to take into account its consensus full-year FY 2024 revenue contraction forecast of -6.8%.
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