Pinduoduo's (NASDAQ:PDD) stock recently tumbled after the Chinese e-commerce company posted its fourth-quarter numbers. Its revenue rose 91% annually to 10.79 billion yuan ($1.55 billion), but missed estimates by $40 million and marked its slowest growth since its IPO.

Its non-GAAP net loss narrowed from 1.9 billion yuan to 815 million yuan ($117 million), or $0.12 per ADS, which cleared estimates by a dime. On a GAAP basis, which includes stock-based compensation and other one-time charges, its net loss narrowed from 2.42 billion yuan to 1.75 billion yuan ($252 million).

Pinduoduo's numbers weren't terrible, but its cash and equivalents fell 59% annually to 5.77 billion yuan ($828 million) as it ramped up its promotions and subsidies. It also didn't provide any forward guidance, which raises questions about its ability to deal with the novel coronavirus outbreak in China.

A young woman takes a selfie with a pair of shoes.

Image source: Getty Images.

Tracking Pinduoduo's slowdown

Pinduoduo controlled about 7% of China's e-commerce market last year, according to eMarketer, putting it in third place behind Alibaba (NYSE:BABA) and JD.com (NASDAQ:JD). Pinduoduo carved out a niche with its group purchase model, which encouraged shoppers to team up on bulk purchases for steep discounts.

Pinduoduo's business model caught on in lower-tier cities across China, and it capitalized on that momentum to expand into higher-tier cities with brand name goods. It sold brand name products at lower prices than other marketplaces, but it subsidized the difference out of its own pocket via a 10 billion yuan ($1.4 billion) "subsidy plan."

That desperate strategy sparked retaliations from Alibaba and JD across lower-tier cities. Alibaba pushed back with its flash sale platform Juhuasuan and a dropshipping platform called Taoxiaopu, while JD launched a discount marketplace called Jingxi. Alibaba also started banning its merchants from listing their products on Pinduoduo -- a move that sparked complaints and antitrust concerns.

Yet Pinduoduo's monthly active users (MAUs) still grew 77% annually to 481.5 million during the quarter. Its active buyers rose 40% to 418.5 million, and its annual spending per active buyer climbed 53% to 1,720.1 yuan (US$247.10). Those numbers look solid, but its growth in MAUs and annual spending decelerated from previous quarters.

YOY growth

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019

MAUs

93%

74%

88%

85%

77%

Active buyers

71%

50%

41%

39%

40%

Annual spending per active buyer

95%

87%

92%

75%

53%

Revenue

379%

228%

169%

123%

91%

Source: Pinduoduo quarterly earnings.

Pinduoduo's slowdown is worrisome, because it coincides with JD's robust growth rates over the past year. JD's annual active customers grew 19% annually to 362 million last quarter, marking its strongest quarterly growth in three years, and 70% of its new customers came from Pinduoduo's base of lower-tier cities.

A murky outlook hinting at wider losses

Pinduoduo's revenue rose 130% to 30.1 billion yuan ($4.33 billion) for the full year. Analysts expect its revenue to rise 59% in 2020, but that forecast doesn't fully account for the impact of the coronavirus crisis.

During the conference call, CEO Colin Huang stated that prices for daily necessities and protective equipment initially "surged" during the outbreak, so it directly subsidized sales of those products to reduce prices for consumers. Huang admitted that decision would throttle Pinduoduo's "short-term" returns.

Huang also noted that many of its products were sold out and couldn't be replenished in time, resulting in delays and cancellations of orders. Huang didn't offer any forward guidance for the first quarter or full year.

However, investors should recall thatAlibaba expects a decline in marketplace revenue in the current quarter, while JD anticipates "at least" 10% growth. JD uses its own logistics network, while Pinduoduo and Alibaba mainly rely on third-party logistics services. That difference seems to be insulating JD from the current crisis.

Stuck between a rock and a hard place

Pinduoduo is in a more precarious spot than Alibaba and JD. It plans to keep taking losses as it ramps up its subsidies and promotional efforts, but its user growth is slowing as Alibaba and JD court its lower-income shoppers.

Pinduoduo's stock also isn't cheap at nearly 10 times trailing sales. JD trades at less than one times its annual revenue, has superior scale, and is profitable -- so it's smarter to stick with the market leader instead of the struggling underdog.