Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
For a stock that's not even two months old on the public markets, social shopping company Pinduoduo (NASDAQ:PDD) has already lived a very exciting life. Up 40% on its IPO day in July, the stock proceeded to lose 35% of its value through its low point in August.
Since then, Pinduoduo shares have rebounded 60%, helped by a well-received earnings report at the end of the month. And now, Wall Street is saying there's more growth where that came from.
Here's what you need to know.
What is Pinduoduo?
Fellow Fool.com contributor Leo Sun introduced us to Pinduoduo stock shortly after its July IPO. In contrast to larger online commerce companies Alibaba and JD.com, which conduct more or less ordinary online sales, Pinduoduo has a business model of selling cheap goods to shoppers in bulk, with multiple shoppers banding together to make group purchases, then divvying up the loot in a phenomenon dubbed "social shopping."
How is Pinduoduo doing?
The No. 3 online e-tailer in China, Pinduoduo claims only about a 5% market share in the Middle Kingdom -- but it's growing fast. In its fiscal Q2 2018 earnings report released last month, Pinduoduo reported year over year growth of 583% in gross merchandise volume (GMV). And revenue jumped nearly 2,500%!
As Leo points out, however, Pinduoduo "remains deeply unprofitable." In 2017, S&P Global Market Intelligence showed Pinduoduo reporting losses of just over $80 million on $268 million in revenue. With sales soaring in 2018, however, the company's revenue has more than tripled to $860.5 million booked over the past 12 months -- but losses are exploding. Over the past 12 months, Pinduoduo's GAAP net loss has increased more than 10 times in size, to the extent that the company's now losing more than $1 billion a year.
On top of that, free cash flow that was at least positive in 2016 and 2017 has now turned negative, and Pinduoduo has begun burning cash.
What Wall Street says
Attracted by Pinduoduo's sales growth and undeterred by its lack of profits, Beijing-based investment banker China Renaissance announced this morning that it is initiating coverage with a buy rating and a $32 price target.
Pinduoduo's social shopping business model is "disruptive," sayings China Renaissance in a note covered by StreetInsider.com this morning, and is "stimulating [a] vast amount of organic traffic from social networks such as WeChat and QQ."
For shoppers, Pinduoduo offers "a fun, browsing-based shopping experience," the analyst argues. At the same time, Pinduoduo's emphasis on pushing ultra-low-cost goods (Leo cites "discounts of up to 90% per item") helps "unbranded" (as well as branded) merchants find a market for their goods, increasing the size of the overall online sales market. As a result, China Renaissance makes the astounding prediction that over the next three years, Pinduoduo is likely to grow its GMV in excess of 100% -- annually.
Incidentally, China Renaissance's recommendation echoes a similar prediction by investment banker Goldman Sachs, which initiated coverage of Pinduoduo stock last week with a buy rating and a price target of $31.90 per share. As Goldman exulted in a note covered by TheFly.com, Pinduoduo is now literally the "fastest-growing internet company in the world" in terms of sales.
What it means to investors
When you consider how much faster Pinduoduo grew its own revenue (2,500%) than it grew its GMV (500%-plus) over the past year, China Renaissance's prediction of 100%-plus annual GMV growth over the next few years appears to imply that the company's own revenue will grow even faster than 100%. That should justify a very high multiple to earnings on Pinduoduo stock.
Of course, first Pinduoduo needs to get some earnings. The question is whether continued sales growth will lead ultimately to profits for Pinduoduo, or simply drain away sales and profits that would otherwise go to Alibaba and JD.com? For what it's worth, the consensus on Wall Street is that Pinduoduo will in fact continue to lose money this year, but break even in 2019, and turn its first profit in 2020.
And so here's the upshot for investors: You can bet on whether Goldman Sachs and China Renaissance are right about Pinduoduo being a buy today -- but you'll probably have to wait two more years to find out if that was a good bet or not.