Pinduoduo's (PDD 2.80%) stock recently rallied after the Chinese e-commerce company posted its fourth-quarter report on March 21.
Its revenue rose 3% year over year to 27.23 billion yuan ($4.27 billion), which missed analysts' estimates by $440 million. However, it posted an adjusted net profit of 8.44 billion yuan ($1.33 billion), compared to a net loss of 184.5 million yuan a year ago, and its adjusted earnings of $0.92 per ADS crushed analysts' expectations by $0.55.
That earnings beat deflated the bearish belief that Pinduoduo would struggle to generate sustainable profits from its discount marketplace. It also indicated its beaten-down stock, which was cut in half over the past six months amid China's unpredictable crackdown on its top tech companies, could be undervalued at three times this year's sales.
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Pinduoduo usually attracts less attention than Alibaba (BABA 0.59%) and JD.com (JD 6.12%), the country's two largest e-commerce companies. However, three key things differentiate Pinduoduo from its top competitors.
1. It's focused on agricultural growth
Pinduoduo, which was founded in 2015, initially attracted a lot of shoppers with a discount marketplace that promoted bulk orders. By teaming up with other shoppers -- which Pinduoduo actively encouraged with integrated social media links -- consumers could score steep discounts on select products.
However, Pinduoduo subsequently expanded into the agricultural market with a "farm to table" platform that allowed farmers and small produce vendors to directly ship their agricultural products to online shoppers. By cutting out middlemen retailers, Pinduoduo was able to sell fresh groceries at lower prices than Alibaba's Freshippo grocery stores, JD's 7Fresh markets, and other traditional supermarkets.
Pinduoduo's total orders jumped 59% to 61 billion in 2021. During the conference call, its VP of Finance Jing Ma partly attributed that growth spurt to a "significant increase in agricultural orders on our platform."
That higher mix of cheaper agricultural products has been reducing its average order value in recent quarters, but it also differentiates its platform from Alibaba, JD, and other competitors in China's crowded e-commerce sector.
2. All of its near-term profits will fund a government-backed plan
In the second quarter of 2021, Pinduoduo launched a 10 billion yuan ($1.6 billion) agricultural initiative, in which it would allocate all of its near-term profits -- up to a cumulative total of 10 billion yuan -- toward the state-backed modernization and expansion of China's agricultural sector.
That decision might seem like a direct response to President Xi Jinping's "common prosperity" push, which urged private companies to fund government-backed projects, but the initiative could also accelerate the growth of Pinduoduo's own agricultural business with better logistics networks for rural areas and technological upgrades for older farms.
Pinduoduo has already generated 7.77 billion yuan ($1.22 billion) in net profits on a generally accepted accounting principles (GAAP) basis in 2021, so it will likely exceed its 10 billion yuan target sometime in 2022.
3. It serves more customers than JD.com
Pinduoduo was the third-largest e-commerce player in China in 2021, according to eMarketer, with a 13.2% share of the market's total gross merchandise volume (GMV) -- or the value of all goods sold.
Alibaba ranked first with a 47.1% share, JD came in second with a 16.9% share, and all of the other players held shares of less than 2%.
But in terms of customers, Pinduoduo was actually the second-largest e-commerce marketplace with 868.7 million annual active buyers at the end of 2021, which represented 10% growth from a year ago. Alibaba and JD ended the calendar year with 979 million and 569.7 million annual active buyers in China, respectively.
Pinduoduo serves more customers than JD but generates less GMV because it primarily sells cheaper products to lower-income shoppers. However, it's also been gradually expanding into China's higher-tier cities with pricier products and brand-name partnerships to challenge Alibaba and JD.
At the same time, Alibaba and JD are striking back against Pinduoduo in lower-tier cities with their own discount marketplaces.
Therefore, investors shouldn't dismiss Pinduoduo as just another underdog in China's e-commerce market. Instead, it's the only player that has been able to consistently pull shoppers away from Alibaba and JD -- and its bottom-line growth indicates that economies of scale are kicking in.
Is Pinduoduo's stock worth buying?
Analysts expect Pinduoduo's revenue to rise 58% in 2022, then grow 33% to 148.9 billion yuan ($23.4 billion) in 2023. They expect its GAAP net income to grow 63% in 2022, then climb 52% to 19.3 billion yuan ($3 billion) in 2023.
We should take those rosy estimates with a grain of salt, but they indicate that Pinduoduo will continue to grow at a much faster rate than Alibaba and JD as it expands its agricultural ecosystem.
If you believe China will ease off its regulatory crackdown and the U.S. won't delist Chinese stocks over auditing rules, then Pinduoduo looks like a compelling buy right now. However, the stock will likely continue to trade at a discount to its revenue growth as long as the market continues to fret over the regulatory uncertainties and other macroeconomic headwinds.
