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3 Reasons Why Pinduoduo Could Be Your Perfect Growth Stock

By Lawrence Nga – Feb 12, 2020 at 9:16AM

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The Chinese e-commerce up-and-comer has advantages its larger rivals can't easily replicate.

Pinduoduo (PDD 1.02%) is one of the three major e-commerce companies in China. Listed in July 2018, Pinduoduo has since delivered a respectable 84% return to its IPO investors, mainly driven by 123% revenue growth since its market debut.  But despite its strong recent performance, there are three good reasons to think that Pinduoduo is well-positioned to sustain its high growth rates into the future.

1. Solid execution

Founded in 2015,  Pinduoduo rose to its current prominence at an unprecedented pace. In less than five years, the company grew revenue from $0 to $3.5 billion  over the trailing 12 months thanks to its meteoric rise in gross merchandise value (GMV), which reached $117.5 billion for the 12 months ended Sept. 30, 2019. 

That's phenomenal growth, especially when you consider that Alibaba (BABA 0.14%), the biggest e-commerce company in China, took nine years to surpass $100 billion in GMV. Another major competitor, JD.com (JD 1.97%), needed 13 years to reach that mark. Pinduoduo took only four years.

A smiling mother and daughter sit on a couch while shopping online with a smartphone in China.

Pinduoduo succeeded in part by making shopping fun and easily accessible to anyone with a smartphone. Source: Pinduoduo.

Many factors  contributed to the company's success. Its mobile-first, social e-commerce strategy positioned the company well in serving Chinese consumers in the smartphone era. It also made online shopping fun by introducing various games to the shopping experience -- for example, customers can grow virtual farms to receive real fruits -- which allow it to attract and retain customers in a market with more than 1 billion smartphone connections .

In addition, its bulk-purchase model allows customers to invite friends and families to form groups to buy the products. The larger the group, the bigger the discount. This creates significant value for sellers, too, since larger groups of buyers mean bigger purchase orders.

Another important decision was its initial focus on smaller cities, avoiding main areas like Beijing and Shanghai. By doing so, it avoided competing against its larger, well-entrenched rivals in its early days.

Pinduoduo executed this growth plan beautifully in its first few years. If it can sustain this track record, Pinduoduo could become one of China's most successful tech companies.

2. Effective manangement

Pinduoduo's well-run leadership structure boasts three key components that have contributed to the company success.

First, founder, CEO, and chairman Huang Zheng has significant experience in the technology and business fields. Trained as a data scientist, he began his career at Google and was part of the team that established Google China. Before Pinduoduo, he had already founded two companies: an e-commerce platform and a game studio. This multidisciplinary experience, in my opinion, contributed significantly to the success of Pinduoduo. For example, Huang's expertise appears to have aided the company's success in integrating the aforementioned fun and games into online shopping, an important feat that few other e-commerce companies have imagined, much less attempted.

Secondly, Huang has surrounded himself with the necessary talents to run the business. For example, all three key management personnel have been working with him in his previous companies (the earliest since 2007). With support from his experienced team, Huang can better execute his vision and strategy in growing the company.

Thirdly, Huang has significant skin in the game through major share ownership. According to the company's 2018 annual report, he owns nearly 45% of Pinduoduo shares and 89% of the voting power.  That leaves him well-incentivized to grow the company over the long run, as opposed to taking shortcuts to maximize short-term benefits.

3. Ample financial resources

Another important factor that will allow Pinduoduo to sustain its growth trajectory is its solid financial standing.

As of Sept. 30, 2019, Pinduoduo had $2.2 billion in cash and cash equivalents, another $3.4 billion in short-term investments that are readily convertible into cash, and just $719 million in debt. The company did post a net loss of $1 billion over the trailing 12 months, as heavy investments in selling, general, and administrative expenses outpaced sales. But Pinduoduo also generated positive free cash flow of about $1.5 billion in the same period, suggesting a robust underlying business.

Given its healthy cash position, Pinduoduo has the necessary firepower to invest in and grow its business for the foreseeable future.

Big discounts for shoppers, big opportunity for investors

China's online retail shopping market  is expected to continue growing in the next few years, thanks to continued expansion in GDP and higher penetration of online shopping. Pinduoduo management has declined to offer estimates for how much it thinks the company might grow in the future. But as a leading e-commerce platform in China, the company looks well-positioned to ride on this e-commerce tailwind by capitalizing on its three crucial advantages. Thus, for investors looking for exposure to the growing e-commerce market in China, Pinduoduo seems worth exploring further. 

Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends JD.com. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Pinduoduo Stock Quote
Pinduoduo
PDD
$60.66 (1.02%) $0.61
JD.com, Inc. Stock Quote
JD.com, Inc.
JD
$53.34 (1.97%) $1.03
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$78.91 (0.14%) $0.11

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