Full Truck Alliance Q4: Light on Higher Costs (NYSE:YMM)

elevator pitch

i evaluate Full Truck Alliance Co., Ltd. (New York Stock Exchange: YMM) Put the stock on hold. I previously wrote about YMM’s near-term financial outlook and long-term financial goals back in June. February 20, 2023 Introductory article.

In the current update, attention is turned to Full Truck Alliance’s latest quarterly results. YMM’s actual fourth quarter 2023 operating profit fell short of market expectations due to higher-than-expected selling and marketing expenses. Despite the company’s favorable first quarter 2024 revenue guidance, the company’s sales and marketing costs may continue to rise going forward. Given both top-line growth guidance and cost outlook, we are leaving our Hold rating unchanged on Full Truck Alliance.

YMM’s fourth-quarter operating profit miss was below consensus estimates.

On March 7, 2024, before the market opened, Full Truck Alliance disclosed its financial results. In the fourth quarter of 2023 Earnings Press Release.

As disclosed in the earnings release, the company’s regular operating profit decreased -13% QoQ from RMB 458.5 million in the third quarter of 2023 to RMB 398.8 million in the fourth quarter of 2023. More importantly, Full Truck Alliance’s most recent fourth quarter regular operating profit was -13% lower than the market consensus forecast of RMB458.3 million (source: S&P Capital IQ).

Separately, YMM’s revenue in the fourth quarter of last year was 2.408 billion yuan, up +25% year-on-year and +6% quarter-on-quarter. In its earnings call, Full Truck Alliance cited its “rapidly growing user base and order volume” as the main reason for the increase in sales. The company achieved +5% revenue compared to the sell-side consensus revenue estimate of RMB2.303 billion in the fourth quarter of 2023. S&P Capital IQ data. This suggests that Full Truck Alliance’s fourth quarter 2023 operating profit loss was not caused by lower-than-expected sales growth.

The reason Full Truck Alliance’s actual fourth-quarter operating profit fell short of market consensus forecasts was due to higher-than-expected costs. Specifically, YMM’s sales and marketing expenses increased +50% YoY and +45% QoQ to RMB 421 million in the fourth quarter of the previous year. Due to the sharp increase in sales and marketing expenses, the company’s fourth quarter 2023 regular operating margin of 16.6% was -3.3 percentage points lower than analysts’ consensus operating margin forecast of 19.9% ​​(Source: S&P Capital IQ).

In the company’s fourth quarter 2023 earnings call, Full Truck Alliance explained that “marketing investments to acquire new users” and increased “brand promotions to increase brand awareness” contributed to the significant increase in sales and marketing expenses.

Good first quarter revenue guidance was overshadowed by an unfavorable cost outlook.

YMM expects to achieve revenue of 2.135 billion yuan in the first quarter of 2024, based on the midpoint of guidance indicated in its earnings release. The company’s revenue guidance means Full Truck Alliance’s revenue is expected to grow +25% year-over-year in the first quarter of 2024, the same pace as the year-over-year revenue growth it registered in the fourth quarter of 2023.

Transaction fees were YMM’s fastest-growing revenue source in the fourth quarter of 2023, and they will likely be the company’s primary revenue driver this year.

In the fourth quarter of last year, the company’s transaction fees increased by 44% compared to the same period last year. By comparison, revenue generated from Full Truck Alliance’s freight brokerage services and freight listing services increased +19% and +10%, respectively, in the most recent quarter compared to the same period last year. Full Truck Alliance said in its fourth quarter earnings briefing that given “current commission rates are very conservative,” “commission revenue growth” in 2024 “could potentially exceed the growth rate achieved last year (2023).” . “

Full Truck Alliance’s transaction fee revenue model

On the other hand, high operating costs may continue to weigh on Full Truck Alliance’s future profitability.

In its fourth quarter earnings briefing, YMM stated its expectations to “increase user acquisition efforts (in 2024) compared to last year.” The company also said in its most recent quarterly earnings call that “over the long term, we expect sales and marketing expenses to continue to increase in line with the expansion of new business ventures.”

Considering the company’s lower-than-expected fourth quarter 2023 operating profit and forward-looking management commentary, it is reasonable to be concerned that YMM’s actual operating margins in the short and long term may not be as good as investors expect.

Actual share buybacks fall short of expectations

Full Truck Alliance said in its fourth quarter 2023 earnings call that it spent about $200 million on share buybacks between early March 2023 and early March 2024. That said, YMM’s historical one-year buyback return has been about 3%, which is what I think it should be. Decent but unattractive.

In particular, the company has completed only 40% of its one-year, $500 million share repurchase plan that began in mid-March last year.

Given that the company had $3.9 billion in cash and investments on its balance sheet (or roughly 60% of its market capitalization) at the end of 2023, it’s realistic to think that Full Track Alliance has the ability to raise more aggressive funds. Stock repurchase.

More importantly, Full Truck Alliance’s conservatism on share buybacks allows it to send the message that the stock is currently worth 12.9 times (Source: S&P Capital IQ) The normalized P/E consensus for the next 12 months is reasonable.

concluding thoughts

Full Truck Alliance’s outlook is mixed, which warrants a Hold rating.

On the one hand, the company’s sales growth guidance for the first quarter of 2024 is good. YMM expects sales to increase 25% year over year in the first quarter of this year.

On the other hand, YMM is expected to invest more in sales and marketing in the future. This suggests that there is a meaningful risk that Full Truck Alliance’s actual first quarter 2024 and full-year 2024 operating profits and operating margins may not meet analysts’ expectations.