Meituan Dianping (SEHK: 3690) is, without a doubt, a key beneficiary of Covid-19. Investors can see this from the increase in its valuation since the beginning of the year.
Currently trading at more than 100x forward price-to-earnings (PE), it’s one of the few stocks that could even make the likes of Tencent Holdings (SEHK: 700), Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988), and JD.com Inc (NASDAQ: JD) (SEHK: 9618) look cheap.
In this article, I’ll try to see if Meituan Dianping’s high valuation is justifiable.
Share price performance
Since the beginning of the year, the share price of Meituan Dianping has more than doubled, thanks to the market expectation that people will have to stay at home due to the outbreak of Covid-19.
While the share prices of Tencent, Alibaba, and JD.com have grown as well, their growth, in the range of 25-30%, has benn much more modest than that of Meitaun Dianping.
With such differences in their share price growth, and the relatively low earnings of Meituan Dianping, this has pushed Meituan’s PE to a level that dwarfs its other tech peers.
The key question that lingers in investors’ mind is if this can be justified by its fundamentals and its growth.
Investors can do a peer analysis to see if Meituan Dianping outperformed its peers in terms of its growth of the top line and profitability in the first half of 2020.
This is to check if the company really benefitted more from Covid-19 than its peers.
Contrary to what most investors expected, the revenue of Meituan Dianping actually dropped by 1% in the first half of 2020.
This is compared to growth of 30% to 35% in the case of Tencent, Alibaba, and JD.com.
A similar trend is seen in the arena of gross profit where Meituan Dianping underperformed its peers by delivering a 6% growth in the first half of 2020, while its peers’ gross profit grew by around 30%.
The difference is even more stark for Meituan Dianping’s net profit growth as compared to peers.
In my opinion, Meituan Dianping, albeit being a beneficiary of Covid-19, actually underperformed its other tech peers in terms of fundamentals and growth.
Can it be more than a food delivery company?
For the majority of the time, the market has seen Meituan Dianping as a food delivery company.
This is undeniably true given that currently around 60% of its revenue still comes from its core food delivery business.
Another 20% of the revenue comes from the lifestyle ecosystem it’s trying to build (in-store, hotel, and travel), and the rest comes from the other new initiatives, such as bike-sharing and car-sharing.
While Meituan Dianping is the leading food delivery company in China, its other business segments and initiatives haven’t really come to fruition yet.
The current valuation of Meituann Dianping definitely seems rich, especially if investors compare its growth profile and valuation with that of the other tech giants.
The key to Meituan Dianping’s future, in my opinion, is whether it can diversify its businesses away from the core food delivery business and to build an ecosystem that revolves around the lifestyle of its users.
While progress has been made in this regard, the competition it faces is substantial. The outlook for the company remains uncertain whether such a goal can be achieved.