A famous Investopedia quote from Robert Arnott states, “In investing, what is comfortable is rarely profitable.”
In my write-up today, I’m going to look at whether this quote applies to technology companies such as Alibaba, Baidu, Tencent, and Meituan Dianping (HKG:3690). Meituan Dianping is the company I would like to focus on today.
With a market cap valuation of HK $615.1B, Meituan Dianping is Chinese business investors should take note of. The company is aspiring to be the Amazon of services. Its app offers consumers access to regional businesses, food takeout, resort reservations, movie tickets, and ride-hailing services.
Source: Meituan Dianping
Statista states that the online food shipment market will grow at a compound annual growth rate (CAGR) of around 9.5% between 2019 and 2023. This is a market Meituan can benefit from.
Meituan could continue to expand to reach new markets. Currently, the company is going further and further along the road of “helping people eat better and live better.”
How Meituan is performing currently
Meituan has reported sky-high revenue over the past few years, yet this growth is starting to decline as more competition enters the market.
To increase its market share, Meituan has been investing strongly in incentives, as well as aids for distribution bikers and customers.
From the financial reports from the initial setup, Meituan spends a large sum on sales and marketing costs. This has led to declining operating earnings margins.
Meituan has 290 million monthly average users, with the average customer using their service once a month. This will make it easier for Meituan to add new customer interactions by adding new business categories.
This allows the company to grow fast without added customer acquisition expense.
It is not yet easy to evaluate the company’s performance when it comes to profit since Meituan has just started to monetize its business.
A look at Meituan’s sales and marketing expenses
In the context of diversification of business growth, the CEO and Chairman of Meituan, Xing Wang, announced that the company was profitable for the first time in 2019, which saw both positive adjusted web profit on a combined basis and adjusted operating earnings in the food delivery sector.
This is good news for the company. Food shipment makes up Meituan’s core revenue, and growing this segment will help Meituan protect itself from its rival Ele.me of Alibaba (NYSE:BABA).
Meituan is currently developing a ‘local search+ marketplace’ model. Under this model, the company aims to be the ultimate digital destination, connecting consumers to merchants for successful search and order services.
With very solid revenue growth in the last year, Meituan Dianping may be on a path to profitability.
Shareholders take on more risk in the hope of bigger rewards via assessment of long-term profit and revenue trends.
For now, it is difficult to know whether Meituan is worth investing in. The company is still in its nascent stages, and revenues may be negative for some time.
On a positive note, the growth Meituan has already achieved is a beacon of hope for investors.
Furthermore, the adoption of artificial intelligence may help bolster Meituan in the long run, spurring more purchasing and lowering distribution prices. This could make the company more profitable.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This Motley Fool contributor Elton Kuah does not own shares in any companies mentioned.