Pinduoduo (PDD 1.85%) CEO Colin Huang recently stepped down and handed the reins over to his chief technology officer Chen Lei. Chen, who co-founded Pinduoduo with Huang in 2015, has held the CTO title since 2016.
Huang claims Chen was "instrumental to Pinduoduo's growth," and that he has "every confidence" in his ability to "take on more responsibility." Pinduoduo also appointed a new general counsel and VP of Finance as part of the management shift.
Huang will remain the chairman of the board and "closely involved" in Pinduoduo's future, but Chen must address four main challenges right away for the company's stock -- which has more than quadrupled since its IPO two years ago -- to keep climbing.
1. Narrowing its losses
Pinduoduo's revenue rose 130% to 30.14 billion RMB ($4.33 billion) last year, but its adjusted net loss widened from 3.46 billion RMB ($492 million) to 4.27 billion RMB ($613 million).
In the first quarter of 2020, its revenue rose 44% annually to 6.54 billion yuan ($924 million), but its adjusted net loss widened again from 1.38 billion yuan ($196 million) to 3.17 billion yuan ($448 million).
Pinduoduo's losses are widening because it's encouraging brand name merchants to sell their products at steep discounts on its platform, then subsidizing the difference out of its own pocket. Pinduoduo is adopting that strategy to shake off its reputation as a marketplace for cheap and generic products, and to counter its larger rivals Alibaba (BABA 0.80%) and JD.com (JD 1.68%) -- both of which are expanding into lower-tier cities.
Pinduoduo set aside a whopping 10 billion RMB ($1.4 billion) for those subsidies last May. However, Alibaba's Juhuasuan discount marketplace struck back with its own 10 billion RMB subsidy plan last December -- which suggests Pinduoduo's losses will widen as it wages a bruising price war against Alibaba's firmly profitable core commerce business.
2. Countering Alibaba and JD in lower-tier cities
Pinduoduo's group purchase platform, which enables shoppers to team up on bulk purchases, initially attracted lots of shoppers in lower-tier cities. However, Alibaba and JD both launched similar discount marketplaces over the past year.
JD and Alibaba both recently reported that about 70% of their new customers now come from lower-tier cities. If that trend continues, Pinduoduo could lose its lower-income shoppers as it chases shoppers in higher-tier cities with its brand name subsidies.
3. Challenging Alibaba's exclusive deals
Pinduoduo surpassed JD in total active buyers (but not total revenue) last year, and that figure rose 42% annually to 628.1 million last quarter. That puts it in striking distance of Alibaba's 726 million active buyers in China.
Pinduoduo's growth clearly worries Alibaba. In addition to striking back with subsidies, Alibaba is reportedly locking merchants into exclusive deals: If they list their products on Pinduoduo, they risk losing their listings on Tmall and Taobao.
Several merchants have accused Alibaba of anticompetitive tactics. Pinduoduo hasn't called out Alibaba by name yet, but it's admitted it was facing "prolonged pressure exerted by dominant platforms on merchants to take sides" during a conference call last November.
If Pinduoduo wants to survive Alibaba's assault, it should rally its merchants and openly accuse its rival of anticompetitive practices. China's regulators are currently revising their antitrust laws to contain the country's dominant e-commerce and tech companies, so it marks a perfect opportunity to disrupt Alibaba's exclusive deals with merchants.
4. Burning less cash
Pinduoduo's widening losses caused its cash and equivalents to plunge 75% annually to 5.53 billion yuan ($780.5 million) last quarter. It was still sitting on 37.05 billion yuan ($5.2 billion) in short-term investments, but Chen needs to tighten up the company's spending and burn less cash.
Pinduoduo issued a $1 billion convertible debt offering last September and another $1.1 billion private placement in March -- so it could resort to additional debt or secondary offerings to maintain its liquidity.
The key takeaways
For now, investors seem willing to overlook Pinduoduo's widening losses so long as it generates robust revenue growth. The stock also still looks fairly cheap at 1.4 times next year's projected sales.
However, JD and Alibaba pose serious competitive threats, and Pinduoduo's balance sheet will worsen as it resorts to additional subsidies and debt offerings. Chen should steer Pinduoduo away from this money-burning business model, which resembles that of a start-up instead of a public company, if it wants to survive the long game against JD and Alibaba.