The year 2020 has been the most impactful one in recent memory, largely because of the COVID-19 pandemic. Many industries, including airlines, hotels, and retail, saw much of their business come to a screeching halt almost overnight in late February and March. While things have somewhat improved since then, even today, many companies are still facing an extremely challenging time.
But for some companies -- especially those that focus on technology and e-commerce -- the pandemic ended up providing a huge boost. Pinduoduo (PDD -1.38%), a Chinese interactive e-commerce company, is one of those companies that actually managed to benefit from the recent crisis.
Why share price has more than tripled
Founded in 2015, Pinduoduo has since risen to become the second-largest e-commerce company in China, behind only Alibaba in terms of users. The company specializes in the sale of certain product categories (like fresh produce) and pioneered the concept of team selling, where customers can team up to purchase products as a group to earn a price discount. About 88% of Pinduoduo’s revenue comes from its online marketing services and the rest from transaction services. Revenue hit $4.3 billion in 2019 on the back of massive expansion in gross merchandise value (GMV) and was a 130% increase from 2018's total.
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Such strong performance continued even in 2020, evident by its fiscal 2020 third-quarter results. Revenue for the quarter came in 89% higher at $2.1 billion, GMV rose 73% to $214.7 billion on a trailing-12-month basis, and active buyers hit 731 million. The latter is a significant milestone if we consider that Alibaba, the market leader, has "only" 757 million active users. If Pinduoduo can sustain its user growth trend, there's a good chance for the young upstart to surpass its predecessor in user base.
Another significant milestone that Pinduoduo achieved in 2020 is to deliver its first-ever quarterly net profit of $69 million (on an adjusted basis). Though insignificant compared to its multibillion-dollar revenue, its net profit assured investors that the business model -- of selling cheap products in a fun, collaborative environment -- works.
And as the company scales its operation further by growing its user base and spending per user, its profitability could expand further thanks to operating leverage. In other words, unless the company invests aggressively into new ventures, there's a good chance that profit could grow faster than revenue in the coming years.
Though still early days, Pinduoduo shows that it could execute in a competitive environment dominated by giants like Alibaba and JD.com. While competition will remain intense in the foreseeable future -- the incumbents are retaliating with their group buy and $10 billion subsidy program -- the young upstart has acquired the scale to compete against it.
Pinduoduo's strong execution, and the validation of its business model, has given investors good reason to be optimistic. Combined, these factors drove the share price up by more than 270% in 2020.
What it means for investors
There aren't many companies on the planet that could grow revenue from zero to more than $2 billion per quarter in just five years. Pinduoduo, with its track record, has become a contender for the crown position in China's e-commerce industry.
And there is more to expect from the company as it grows its e-commerce business, especially in expanding the agriculture business. Moreover, it could also introduce ancillary services -- such as fintech and logistics -- just like Alibaba extended into payments and cloud computing. To this end, Pinduoduo announced that it's testing an e-wallet, hinting at more projects like that in its development pipeline.
Still, investors should not rush to buy the stock now since it's trading at a high valuation of 41 times 2019's revenue. It would be better to err on the safe side and wait for a lower entry point.
