During the coronavirus outbreak in China in the first quarter, it wasn’t clear whether Covid-19 would be a boon or a drawback for online local services company Meituan Dianping (SEHK: 3690).
On the one hand, the market expected the coronavirus outbreak to drive many new customers to Meituan Dianping who would continue to order from the company years into the future.
On the other hand, the market expected Covid-19 to potentially decrease demand for food delivery in the short term and most definitely hurt Meituan Dianping’s online travel business.
With the first quarter now in the rear-view mirror, here’s how Covid-19 impacted Meituan Dianping and how the company performed.
In terms of its stock price, Meituan Dianping has outperformed so far in 2020. Since the beginning of the year, Meituan Dianping shares have rallied 32% (as of the time of writing).
As a result, Meituan Dianping has outperformed many peers such as Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988).
In terms of the market’s perspective, it seems that Covid-19 hasn’t really hurt Meituan Dianping. It may have arguably helped the company in terms of the market’s perspective by accelerating China’s transition to e-commerce.
Operational performance for the first quarter
For the three months ended 31 March, 2020, Meituan Dianping sales fell 12.6% year-on-year to RMB 16.8 billion (US$2.35 billion). Its operating loss expanded to RMB 1.7 billion from the prior year’s operating loss of RMB 1.3 billion.
In terms of its leading food delivery business, Covid-19 didn’t hurt the company as much as many bears had feared.
For the first quarter, gross transaction volume for Meituan’s food delivery business shrank just 5.4% year-on-year to RMB 71.5 billion.
As a result, Meituan’s food delivery sales fell 11.4% and the segment reported an operating loss of RMB 70.9 million versus an operating profit of RMB 482.8 million for the fourth quarter of 2019.
Despite travel being one of the worst-affected sectors in the market, Meituan reported an operating profit during the challenging period. For the first quarter, the segment’s operating profit shrank 57.3% year-on-year to RMB 680.2 million.
Meituan Dianping CEO Xing Wang said:
“In the long run, we believe that this pandemic will help to better cultivate consumer habits, accelerate online penetration, improve the operational efficiencies of merchants, and ultimately expedite the digitization process of the entire local service industry.”
Meituan Dianping is a growth stock. That’s because Meituan Dianping has a large addressable market in terms of China’s local services market and competitive advantages such as its substantial economies of scale.
In addition, a good management team, as well as a prior history of great execution, mean many investors are willing to take the long view.
Rather than value Meituan Dianping in terms of its profitability in the last year, many growth investors judge it based on future projected earnings years from now given expected total market size, expected market share, and expected margins.
As long as Meituan Dianping continues to execute according to expected growth and expected margin improvements, its stock could continue to climb higher.
So far, Meituan Dianping has met or beaten many of those growth investors’ estimates due to its better-than-expected operational performance in 2020. Although the company didn’t grow in the first quarter, the firm’s results were better than many investors’ expectations.
If it continues to grow at a fast rate after Covid-19 and shows good margin improvements, the stock could continue to go higher. Meituan Dianping certainly has a lot of momentum.
That being said, Meituan Dianping presumably also has more downside than the more profitable Alibaba because the stock isn’t a value stock.
If Meituan Dianping’s growth and margin improvements don’t meet expectations, its share price could undergo a potentially rough growth-to-value transition like Baidu Inc (NASDAQ: BIDU) recently underwent.
Although Meituan Dianping didn’t grow in the first quarter due to Covid-19, the company’s results were better than many expectations.
Based on its stock performance, the benefit of the acceleration to digital for local services has outweighed the fall in demand due to the coronavirus outbreak.