Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Can Walmart make money at Dada Nexus?

The grocery delivery wars are heating up. Walmart (NYSE: WMT) bought a 10.7% stake in Chinese grocery delivery platform Dada Nexus (NASDAQ: DADA).

Dada Nexus combines JD Daojia’s platform for supermarket orders and Dada, a platform that crowdsources food deliveries, Investor’s Business Daily reports. Customers use the combined platform to order food and other items from supermarkets and convenience stores.

Dada Nexus claims to have 11.9 million customers in China. Investor’s Business Daily claims Dada Nexus’s customer base grew by 68% in the past year, rising from 7.1 million. In addition, the average Dada Nexus order has risen by 50% to over $21.

Can Dada Nexus make money?

Walmart owns around 94.88 million shares in Dada Nexus. Dada Nexus Ltd. (NASDAQ: DADA) sold 20 million American Depository Receipts (ADRs) in a 5 June 2020 Initial Public Offering (IPO).

The IPO raised $330 million Reuters reports. An ADR is a negotiable certificate that represents a specific number of shares in a foreign company. Foreign companies sell ADRs on US stock exchanges to raise money in the American market.

DADA Nexus shares began selling at $15.99 on 5 June 2020. By 18 June 2020, Mr. Market paid $22.47 for a DADA share. However, DADA Nexus (NASDAQ: DADA) fell to $20.13 on 22 March 2020. Thus, I think Dada Nexus has growth potential.

However, Dada Nexus loses money. Dada Nexus reported a $279.29 million net loss and a negative profit margin of -25.4% on 31 March 2020. Moreover, Dada Nexus reported quarterly revenues of $1.1 billion on 31 March 2020.

Why is Walmart Buying Dada Nexus?

Walmart (NYSE: WMT) wants to counter Kroger’s (NYSE: KR) partnership with Britain’s Ocado Group PLC (LSE: OCDO).  Kroger bought 5% of Ocado in 2018.

Kroger and Ocado are building 20 robotic fulfillment centers across the United States to support their grocery delivery program. Ocado owns the world’s largest dedicated online supermarket; which controls 15% of the United Kingdom’s online grocery market, Produce Blueprints claims.

Kroger; America’s largest standalone grocery is Walmart’s biggest competitor in the US supermarket business. However, Walmart is America’s largest grocer by sales volume.

Walmart is trying to Counter Kroger with DADA Nexus

Kroger claims its digital grocery sales grew by 92% in the quarter ending on 23 May 2020, CNBC reports. Kroger operates 36 food processing plants and 17 dairies in the United States. In addition, Kroger operates 7,757 supermarkets and supercenters in the United States under several brand names

Kroger and Ocado are building Customer Fulfillment Centers (CFCs) in Groveland, Florida, outside Orlando, and Monroe, Ohio near Cincinnati. Kroger plans additional CFCs in Pleasant Prairie, Wisconsin, in Chicagoland, Forest Park, Geogia, and Dallas.

They could locate other CFCs in the Mid-Atlantic and Pacific Northwest regions. The Dallas Morning News claims Ocado’s robots can pull and pack a 50 item grocery order in six to seven minutes at a Kroger CFC.

I think they intend Walmart’s Dada Nexus alliance to counter Kroger’s Ocado alliance. I think Kroger could become a major threat to Walmart by leveraging Ocado and a delivery platform such as Instacart.

Is Dada Nexus a Good Investment?

Currently, I think Dada Nexus (NASDAQ: DADA) is a poor investment because the legal status of ADRs is in question.

To explain, the U.S. Senate passed legislation that bans companies owned or controlled by foreign governments from listing on US stock exchanges, The South China Morning Post reports. Hence, Congress wants more federal regulation of American Depository Receipts.

However, there is no evidence the Chinese government owns or controls any part of Dada Nexus. On the other hand, bashing China and Chinese owned companies is politically popular in America now. Thus, a hostile political and regulatory environment could keep Dada Nexus out of the United States.

Conversely, Walmart could bring Dada Nexus’s technology to the United States. For example, Walmart could launch its own delivery service or buy a delivery service such as DoorDash, or Grubhub (NYSE: GRUB). Walmart could then adapt Dada Nexus’s technologies to Grubhub or DoorDash.

One situation Walmart needs to avoid is Amazon (NASDAQ: AMZN) or Kroger buying Instacart or DoorDash. To explain, Kroger or Amazon could use Instacart, DoorDash, or Grubhub’s network to deliver its groceries.

Dada Nexus is a Terrible Investment

I think Dada Nexus is a terrible investment and a speculative stock. To explain, the only value at Dada Nexus is purely theoretical.

I consider Walmart (NYSE: WMT); on the other hand, an excellent investment. Mr. Market paid $121.68 for Walmart shares on 22 June 2020. Yet Walmart reported a $7.017 billion quarterly operating cash flow, and a $19.895 billion quarterly ending cash flow on 30 April 2020.

Moreover, Walmart had $14.93 billion in cash and short-term investments on 30 April 2020. Walmart’s cash and short-term investments grew from $9.465 billion on 31 January 2020. Thus Walmart is a cash rich company.

Walmart is a growing company. Stockrow estimates Walmart’s revenues grew at a rate of 8.63% in the quarter ending on 30 April 2020.

Walmart reported quarterly revenues of $134.622 billion and a quarterly gross profit of $32.596 billion on 30 April 2020. Thus, Walmart is a fast growing and cash rich company.

Buy Walmart and Avoid Dada Nexus

In addition, Walmart appears safe from coronavirus because its revenue growth grew during the pandemic. Plus, Walmart’s stock is stable. Walmart started 2020 at $118.94 on 2 January 2020 and grew to $117.99 on 18 June 2020 and $121.68 on 22 June 2020.

Walmart paid a 54₵ quarterly dividend on 1 June 2020, and will pay a 54₵ dividend quarterly on 8 September. estimates Walmart paid a $2.16 annualized dividend and offered a 1.83% annualized yield on 18 June 2020.

In the final analysis, I think buying Walmart shares is one of the best ways for ordinary people to invest in online grocery delivery. Walmart is a cheap cash-rich company that pays a decent dividend.

Moreover, Walmart could cash in on Dada Nexus’s technology without acquiring Dada Nexus’s risks. Thus, I advise investors to avoid Dada Nexus and research Walmart.