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Pinduoduo Reported Its First Ever Profit! Here's What Investors Should Know

By Lawrence Nga – Nov 19, 2020 at 11:07AM

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Pinduoduo is becoming a major force in China's e-commerce industry.

Pinduoduo (PDD -3.98%) last week announced its first-ever quarterly net profit as a publicly traded company. The leading e-commerce company in China reported $69 million in profit (on an adjusted basis) for the third quarter of 2020 thanks to solid revenue growth.

Attaining its first-ever profit is an important milestone for the company, which has been trading on the Nasdaq since July 2018. But there were some other important takeaways to come out of the company's latest earnings report as well. Here are three of them.

1. A quick overview of the latest result

Pinduoduo delivered a solid quarter with growth across all metrics. Revenue surged 89% year over year to $2.1 billion on the back of higher online marketing services (up 92%) and transaction services (up 66%) income. Similarly, operating metrics came in stronger with average monthly active users (MAUs) up 50% year over year to 643 million and annual active buyers up 36% to 731 million.

Woman looking at phone.

Image source: Getty Images.

Notably, year-over-year revenue growth has accelerated from 67% in the previous quarter to 89% on the back of more active buyers, as well as higher spending per buyer. Annual spending per user improved 27% to 1,993 yuan. Both numbers indicate that Chinese consumers are getting more comfortable with shopping on Pinduoduo's platform.

It's also worth mentioning that Pinduoduo is charging its merchants more -- monetization rate for the last 12 months improved to 3% from 2.9% in the previous quarter. As merchants become more accustomed to doing business on Pinduoduo's platform, they naturally end up spending more on advertising, which explains the higher monetization rate. 

2. The business is scaling rapidly

Pinduoduo's latest net profit (on an adjusted basis) signals that the business is approaching critical mass. This is important for many reasons.

To start, it validates the young company's business model -- selling discount products in a fun environment -- and that it has a place in the competitive Chinese market against rivals like Alibaba Group Holding and More importantly, it also provides a hint of what investors can expect from the company as it further scales its operation: a rapidly improving bottom line thanks to operating leverage.

Still, it may be early days to declare victory since Pinduoduo has yet to reach profitability according to generally accepted accounting principles (GAAP). If it can continue to scale its operation, it will just be a matter of time until it turns in its first profit on a GAAP basis.

3. A solid balance sheet to support further growth

A latecomer in the e-commerce industry, Pinduoduo has been investing heavily in sales and marketing -- accounting for 71% of its revenue for the quarter -- to attract new users, as well as to retain existing users. So far, the strategy has been working beautifully, propelling Pinduoduo to become the second-largest e-commerce company in China (in terms of active buyers) after Alibaba.

This spending spree is likely to continue for the foreseeable future as Pinduoduo tries to gain market share in the e-commerce industry. In particular, it has committed to further expanding its agricultural products business by launching Duo Duo Maicai -- a service that allows users to pre-order cheap, locally produced agricultural products for next-day collection at nearby locations. This new service requires significant investment in areas beyond just advertising, especially in logistics infrastructure.

In short, Pinduoduo needs a lot of capital to sustain its growth trajectory, and fortunately, it has plenty. As of Sept. 30, 2020, it has $6.7 billion in cash and $800 million in debt. What's more, its low debt level provides ample room for it to raise more, and that ensures it has enough firepower to pursue its growth plans.

The takeaway

A young start-up that just recently turned five years old, Pinduoduo has proven that it could compete against large incumbents like Alibaba and JD. Still, the Chinese e-commerce market is extremely competitive, and investors should remain watchful of the young upstart's performance going forward. A material slowdown in its growth rate and a sudden increase in losses are red flags to watch out for. 

Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd. and The Motley Fool has a disclosure policy.

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