Pinduoduo's (PDD +3.63%) stock plunged 16% to a new 52-week low on Nov. 26 after it posted its third-quarter earnings report.
The Chinese e-commerce company's revenue rose 51% year over year to 21.51 billion yuan ($3.34 billion), but missed analysts' estimates by $690 million. However, its adjusted net income surged 575% to 3.15 billion yuan ($489 million), or $0.34 per American depository share (ADS), and beat expectations by $0.30.
Pinduoduo's headline numbers looked impressive, but concerns about its decelerating growth, regulatory headwinds, and commitment to China's "common prosperity" push are weighing down the stock. Are those fears justified -- or is it time to buy some shares of this high-growth company?
Image source: Getty Images.
Tracking Pinduoduo's slowdown
During the third quarter, Pinduoduo's number of monthly active users (MAUs) rose 15% year over year to 741.5 million, while its annual active buyers increased 19% to 867.3 million.
Pinduoduo is the second-largest e-commerce platform in China in terms of total shoppers after Alibaba (BABA +2.23%), which served 953 million annual active customers with its Chinese marketplaces last quarter.
However, Pinduoduo and Alibaba still both generate lower revenues than JD.com (JD +1.35%), which served 552 million annual active customers last quarter. That's because JD generates most of its revenue from its first-party marketplace, while Pinduoduo and Alibaba generate most of their revenues by collecting listing fees and commissions from third-party sellers.
But Pinduoduo still differs from Alibaba's Taobao and Tmall marketplaces in two key ways. First, it encourages shoppers to team up on bulk purchases to get deeper discounts. Second, it enables farmers and small produce vendors to directly sell their agricultural products to online shoppers.
That "farm to table" approach enables Pinduoduo to sell its products at lower prices than Alibaba's Freshippo grocery stores, JD's 7Fresh markets, and other traditional supermarkets. Pinduoduo is still a high-growth company, but its momentum is clearly waning:
|
Growth (YOY) |
FY 2019 |
FY 2020 |
Q1 2021 |
Q2 2021 |
Q3 2021 |
|---|---|---|---|---|---|
|
MAUs |
77% |
50% |
49% |
30% |
15% |
|
Annual Active Buyers |
40% |
35% |
31% |
24% |
19% |
|
Revenue (RMB) |
130% |
97% |
239% |
89% |
51% |
Source: Pinduoduo. YOY = Year-over-year. RMB = Renminbi, or Chinese Yuan terms.
Pinduoduo didn't provide any forward guidance, but analysts expect its revenue to rise 37% in the fourth quarter and 83% for the full year. Next year, they expect its revenue to increase 42%. Therefore, Pinduoduo is still growing much faster than its closest rivals -- analysts expect Alibaba's revenue to rise 18%, and for JD's revenue to increase 29% next year.
But what about Pinduoduo's profits?
Pinduoduo's bottom line was swimming in red ink last year. But in the first nine months of 2021, it generated a net profit of 1.15 billion yuan ($178 million) on a generally accepted accounting principles (GAAP) basis, compared to a net loss of 5.8 billion yuan in the first nine months of 2020.
It narrowed its operating loss from 7.33 billion yuan to just 10.2 million yuan ($1.6 million) during that period, while its interest and investment-related gains enabled it to generate a net profit.
Analysts expect Pinduoduo to stay profitable for the full year and grow its adjusted earnings per share (EPS) by nearly eight times next year.
However, CEO Lei Chen said Pinduoduo would allocate all of its profits to the expansion of the "10 billion (yuan) agriculture initiative" it launched in the second quarter. Chen said the initiative, which seems to be a response to the "common prosperity" drive which President Xi Jinping set in motion earlier this year, will "not be driven by profit or commercial goals" but rather focus on addressing the critical needs of China's agricultural sectors in rural areas.
"Back in August, Chen said the initiative "will clearly impact the short-term earnings per share for shareholders" because it would allocate all of its profits toward hitting that 10 billion yuan goal. I believe that commitment could throttle Pinduoduo's ability to make aggressive investments or acquisitions over the next few quarters.
Pinduoduo generated 4.06 billion yuan ($629 million) in GAAP net profits in the second and third quarters of 2021. Therefore, it will likely take a few more quarters of stable profits to hit the 10 billion yuan threshold. On the bright side, those agricultural investments could make it much easier for Pinduoduo to expand its online farm-to-table business over the long term.
The valuations and verdict
Pinduoduo's stock trades at less than four times next year's sales, which makes it cheap relative to other tech stocks with comparable growth rates. However, the near-term earnings pressure from its 10 billion yuan commitment, China's unpredictable regulatory moves, and the inflationary pressures for high-growth tech stocks are all making it less attractive.
Pinduoduo is a better buy than Alibaba, which faces tougher regulatory headwinds and a more complex slowdown, but it isn't necessarily a better buy than JD, which generates more consistent growth and isn't shackled to such a massive commitment to President Xi's "common prosperity" drive.
Pinduoduo still has a bright future, but I can't recommend buying it until its growth stabilizes and it fulfills its 10 billion yuan commitment. Until then, investors should buy other high-growth e-commerce stocks instead.
