China’s largest food delivery platform, Meituan, has witnessed a steep decline in its stock value, shedding nearly 40% since its peak in January. The situation may not improve anytime soon as market sentiment turns increasingly bearish, with the volatility skew on Meituan at its most pessimistic since February.

Several factors contribute to Meituan’s struggles, reflecting broader issues in China’s consumption growth and a more challenging economic environment. China’s economic growth is faltering, with recent figures from the Golden Week holiday showing subdued spending and travel, indicating a prolonged economic slowdown. The competition in the food delivery and e-commerce sector is also intensifying, further complicating Meituan’s path to recovery.

Meituan’s plight is reflected in its stock performance, which significantly lags behind other tech firms in Hong Kong, with nearly 40% losses year-to-date, while the Hang Seng Tech Index is down about 7%. The company’s shares have erased all gains achieved after China eased Covid restrictions late last year.

Several concerns plague Meituan, including the need for increased spending to compete with ByteDance Ltd. and fund its loss-making group-buying platform, which offers deeper discounts when a group of buyers purchase together. The core food delivery business is facing margin pressure due to growing competition in the field.

In August, Meituan cautioned of slower growth in food delivery orders in the third quarter, attributing it to economic uncertainty and extreme weather conditions.

Analysts are skeptical about Meituan’s growth prospects without offering more discounts, which will impact profitability. Kai Wang, an analyst at Morningstar Inc., anticipates a significant slowdown in the food delivery business.

The options market indicates a bearish outlook, with the premium for options contracts betting on a 10% drop in Meituan’s stock price over the next three months at its highest level since February, compared to contracts speculating on a 10% gain.

While some remain optimistic about Meituan’s position in the market, claiming it can maintain its leadership despite ByteDance’s challenge, doing so is likely to require substantial investments that may impact profitability. Meituan’s ability to outperform its rivals could come at a considerable cost, potentially leading to further margin erosion.

Ellie Jiang, an analyst at Macquarie Capital Ltd., believes Meituan will maintain an aggressive investment strategy in the second half of the year to protect its market share, but this could result in a decline in operating profit margins in the third quarter compared to the previous year. The road ahead for Meituan remains uncertain as it navigates through fierce competition and challenging market conditions.