Meituan starts losing money again, so what?

The author was a senior executive of a large tech-enabled coffee startup in China, who previously wrote about China’s non-existent ‘trillion dollar’ coffee market and why Robotic barista will not work on TLD. He prefers to be anonymous but accepts feedback through the TLD team (hello@mworks.asia). 

On Friday, Meituan announced its full year (2020) results. A key point that caught investors’ attention is that the company went back into operational loss in Q4 2020.

The take rate, the commission it charges merchants, has also dropped to about 12.19%, from more than 13% in 2019. While that is highly likely a deliberate strategy (to move the emphasis from commission to merchant advertising).

The main reason for the CNY 2.24 billion loss in Q4 is the investment into new businesses, mainly community groupbuy (called “Meituan Select”).

It seems the market does not like losses this time round – over the past month Meituan’s share price has dropped almost 40% from its peak:

And we have seen a few analysts adjusting the target price downwards.

Here I am not going to analyse or interpret the financial reports in detail – many people have done that. The only thing I have to say here is that the released numbers roughly correspond with what a few friends of mine have estimated. All of them are bullish about the company’s long term prospects.

The parallel with Amazon

What I would like to highlight here, though, is the story of Amazon. We all know that Amazon has been a great success for investors over the years. An investor who bought it at the IPO (and still holds it) will have earned more than 1700 times return:

We all know by now that Amazon for a long time prioritised growth over profitability – to the chagrin of its competitors whose investment demand profit and keep their eyes on P/E ration.

however, Amazon’s share price was not at all smooth sailing. It has experienced a number of large scale retreats that were very painful for the holders:I see something very similar here as what Meituan is going through now – building up infrastructure in a market with massive potential, with visionary and stable leadership that is also very strong in execution, and investing all its (positive) cashflow into (loss making) new businesses.

Amazon stood for doing the right thing; and its investors who had conviction through all these difficult times eventually were handsomely rewarded.