Which was the best-performing large e-commerce stock of the last 12 months? Was it Amazon (AMZN -1.64%)? MercadoLibre? Shopify?

Nope. While the stock price for these three companies each rose over 50% in that timeframe, their stock price returns pale in comparison to those of Chinese online retail giant Pinduoduo (PDD -0.37%). Shares of Pinduoduo more than quadrupled in price in 2020, as strong growth in its underlying business turbocharged investor sentiment.

But aside from an improving business and the ensuing market optimism, there are other important drivers behind Pinduoduo's roaring success. These factors will likely drive Pinduoduo's future performance, so let's take a closer look at a few of them.

Woman with smartphone

Image source: Getty Images.

Laser-focused on "doing the right thing"

One of the most critical, yet overlooked aspects of Pinduoduo is that it goes out of its way to do the right thing for its stakeholders. In fact, in Pinduoduo's IPO filing, founder and chairman Huang Zheng said the company's core value is "Ben Fen," a Chinese term that means "doing the right thing."

Of course, it'd be silly to take Huang Zheng's words as gospel. Alphabet's Google is well known for its unofficial slogan, "Don't be evil," but that has been long a subject of contentious debate. After all, ex-Google CEO Eric Schmidt famously said in a Wired interview that "Evil is what Sergey [Brin] says is evil."

But so far, Pinduoduo has lived up to its mantra -- and is all the better for it.

For example, it's kept its take rate at 3% of the gross merchandise value (GMV) -- a rate that's low compared to the 5% to 10% charged by other e-commerce platforms. eBay, in comparison, charges a 10% to 12% commission rate for most products sold on its platform. With a low take rate, Pinduoduo has lowered barriers to entry for new merchants while attracting merchants from rival marketplaces. Many in the current crop of Pinduoduo sellers were originally on Alibaba's (BABA 2.92%) Taobao platform. 

On the customer side, Pinduoduo has historically focused on delivering value-for-money products. And by incorporating online games on its platform -- such as virtual farms that yield real fruits -- Pinduoduo has turned online shopping from a point-and-click affair into a fun, interactive experience. It is also transforming itself into a one-stop-shop where customers can buy almost anything. By continuously expanding the range of products available, the online platform attracts new merchants and brands selling everything from toothbrushes to Rolls-Royce cars!

Even Chinese farmers have benefited from working with Pinduoduo. Due to their lack of direct access to consumers (and their perishable product offerings) farmers have long had to rely on middlemen who rip them off and reduce their profits. Pinduoduo helps farmers by teaching them how to sell to consumers directly on its platform and offering AI-generated farming suggestions.The result has been a win-win situation: Farmers now earn better margins while consumers pay lower prices.

These are just some examples of how Pinduoduo walks the walk when it comes to serving stakeholders. Staying true to its word is why Pinduoduo is now the second-largest e-commerce platform in China -- despite only launching in 2015.

World-class execution in action

For Pinduoduo, having the right values are important -- but that's just half the story. More importantly, it's turned those values into action.

While Pinduoduo is barely five years old, it's grown its GMV to 1.5 trillion yuan ($215 billion) in the last 12 months. That's about half of Amazon's 2020 GMV of $475 billion. 

In the process, revenue has gone from zero in 2015 to 44 billion yuan ($6.4 billion) in the last 12 months. Investors have responded by sending the stock hurtling upwards, resulting in Pinduoduo having a $212 billion market cap. It's the largest 5-year-old company I've ever come across.

Pinduoduo's latest quarterly figures continue to display the robustness of its business model. Revenue in the third quarter of 2020 surged 89% year over year, while active buyers -- customers who made at least one purchase in the last 12 months -- jumped 36% to 731 million. It also reported its first adjusted profit. That's pretty remarkable, especially if we consider the severe economic havoc wreaked by COVID-19. 

While Pinduoduo's rapid growth can be partially attributed to its focus on lower-income customers, it is now evolving into a full-fledged online store for all. To do so, it banks on its effective and cost-efficient marketing strategy, which involves an eclectic mix of group buying discounts, viral ads, and the 10 billion yuan subsidy program. The subsidy program -- where Pinduoduo subsidizes merchants selling products at steep discounts -- will be key in drawing in wealthier users from JD.com (JD 2.61%) or Alibaba's Tmall.

Overall, Pinduoduo's proven ability to execute will enable it to sustain its growth story. The company will likely continue riding the ongoing boom in e-commerce, as well as the expansion of its new agriculture business, Duo Duo Mai Cai.

Pinduoduo has a bright future, but it's not a buy now

By now, it isn't hard to see that I'm extremely bullish about Pinduoduo and its prospects. But investors should know what they're getting into. 

For one, its rivals are not sitting still. For example, both Alibaba and JD have ventured into the group-buying business by copying the Pinduoduo playbook. Both e-commerce giants have also announced their own 10 billion yuan subsidy programs. In other words, for Pinduoduo, the real battle has only just begun.

And though I'm excited about Pinduoduo, I'm not a fan of its high valuation. Pinduoduo's trading at 34 times trailing-12-month revenue -- an exorbitant valuation by any measure. A good company trading at an excessively high price? That could still turn out to be a horrible investment.

If you're a conservative investor, Pinduoduo is probably not for you. Instead, you should put the stock on your watch list and wait for a more attractive entry point.