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3 Reasons Pinduoduo Stock Fell by More Than 30% in 2021

By Lawrence Nga - May 7, 2021 at 8:05AM

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The Chinese e-commerce company faces some short-term challenges, but its long-term prospects remain intact.

Chinese e-commerce company Pinduoduo (PDD -1.43%) was one of 2020's best-performing stocks, rallying by more than 300% during the year. The surge in online shopping driven by pandemic lockdown orders and social distancing efforts benefited major e-commerce players like Sea Limited and Amazon. Pinduoduo, too, rose to the occasion, gaining major ground on rivals Alibaba (BABA 1.08%) and JD.com. Its revenue grew by 97% year over year in 2020.

But Pinduoduo's share-price climb seems to have run out of steam, despite continued strength for some other tech bellwethers. Facebook share prices even hit an all-time high last week, underscoring that there's sustained demand among investors for quality tech names. Pinduoduo stock, on the other hand, is now trading down about 37% from its peak in mid-February.

Here's why the company and its stock may have fallen out of favor.

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Image source: Getty Images.

3 reasons Pinduoduo stock has tumbled in 2021

Pinduoduo's emergence as a major force in e-commerce has been nothing short of remarkable. In just five short years, it went from an unknown start-up to China's biggest e-commerce platform, with more active buyers than Alibaba. Revenue grew at a stunning rate and hit 59.5  billion yuan ($9.2 billion) in 2020, almost doubling year over year.

The company owes much of its success to founder Zheng Huang, a data scientist and entrepreneur who was part of the team that set up Alphabet's Google China. But less than a year after he relinquished his role as CEO (on July 1, 2020) -- a move that was itself shocking -- Huang also recently stepped down as chairman of the board. That latest move may have spooked investors further -- the stock price is down 17% since the announcement on March 17.

But that's not the only reason for concern. Chinese regulators have launched wide-ranging antitrust probes into that nation's large tech companies. The government just fined Alibaba $2.8 billion for breaking anti-monopoly laws. Tencent and Baidu were hit with much smaller fines in March for making acquisitions without notifying authorities.

There's no clear evidence -- so far -- that Pinduoduo is involved in anti-competitive activities. But what's clear is that China is tightening its grip over its local tech titans, hurting their growth prospects. As one of China's biggest e-commerce companies, Pinduoduo will need to adapt to those challenges.

In addition to these two reasons, the tide in the stock market is turning against high-growth tech companies. With many Americans beginning to resume their pre-pandemic ways, investors are selling the hypergrowth tech stocks that flourished during 2020, taking their profits, and shifting their bets into "reopening" plays like Wells Fargo and Dine Brands Global. Some of last year's hottest names like Tesla and Snowflake are down by 20% to 50% from all-time highs. As Pinduoduo was one of 2020's best-performing stocks, there's a high chance that some of its recent declines can be attributed to it getting caught up in the wider tech sell-off.

What's next for Pinduoduo?

Huang's abrupt exit from day-to-day operations at Pinduoduo has left investors with a clouded outlook heading into 2021. But it's worth noting that he remains the company's biggest shareholder. As a result, he will likely continue providing some guidance to the company. What's more, he has left Pinduoduo's management in good hands. New CEO Lei Chen -- who has worked with Huang since 2011 -- has been a key contributor to growing it into the powerhouse that it is today. 

Over the next few years, Pinduoduo is well-positioned to expand further on the back of rising customer spending. Its users spend just 2,115 yuan ($300) a year on the platform, still low compared to what the average customer spends on Alibaba. Beyond e-commerce, Pinduoduo has a vision to build a "worldwide presence in agriculture," which could dramatically widen its addressable market. Agriculture-related gross merchandise value (GMV) nearly doubled from 136 billion yuan in 2019 to 270 billion yuan in 2020. Management expects to hit 1 trillion yuan (around $150 billion) in annual agriculture by 2025.

In other words, Pinduoduo is just getting started -- and growth-oriented investors should take note.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Alphabet (A shares), Alphabet (C shares), Amazon, Baidu, Facebook, JD.com, Sea Limited, Snowflake Inc., Tencent Holdings, and Tesla. The Motley Fool recommends the following options: long January 2022 $1920.0 calls on Amazon and short January 2022 $1940.0 calls on Amazon. The Motley Fool has a disclosure policy.

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