Pinduoduo's (PDD 2.69%) stock rallied 15% on May 27 after the Chinese e-commerce company posted its first-quarter earnings report. Its revenue rose 7% year over year to 23.79 billion yuan ($3.75 billion), which beat analysts' estimates by $670 million.
It generated an adjusted net profit of 4.20 billion yuan ($663 million), compared to a net loss of 1.89 billion yuan a year ago, which trickled down to an adjusted profit of $0.47 per American Depositary Share and surpassed analysts' expectations by $0.20. On a generally accepted accounting principles (GAAP) basis, it posted a net profit of 2.60 billion yuan ($410 million), compared to a net loss of 2.91 billion yuan a year ago.
Pinduoduo's growth rates allayed some concerns about the recent regulatory, macroeconomic, and COVID-related headwinds in China. But is this former high-growth darling -- which lost more than 60% of its market value over the past 12 months -- still worth buying as a turnaround play?
Image source: Getty Images.
How fast is Pinduoduo growing?
During the first quarter, Pinduoduo's monthly active users (MAUs) grew 4% year over year to 751.3 million. Its number of active buyers increased 7% to 881.9 million over the past 12 months.
Pinduoduo's growth in MAUs, active buyers, and revenue decelerated significantly over the past year. However, its year-over-year growth in MAUs and revenues still accelerated slightly in the first quarter, as seen in this table.
|
Metric |
Q1 2021 Growth (YOY) |
Q2 2021 Growth (YOY) |
Q3 2021 Growth (YOY) |
Q4 2021 Growth (YOY) |
Q1 2022 Growth (YOY) |
|---|---|---|---|---|---|
|
MAUs |
49% |
30% |
15% |
2% |
4% |
|
Active buyers |
31% |
24% |
19% |
10% |
7% |
|
Revenue |
239% |
89% |
51% |
3% |
7% |
Data source: Pinduoduo. YOY = Year over year.
During the conference call, Pinduoduo CEO Chen Lei said, "Given our current scale, our user growth will inevitably slow down." As its platform matures, Lei said Pinduoduo would shift its "priority from winning new users" toward finding new ways to "better serve our existing user base."
NASDAQ: PDD
Key Data Points
Focusing on agricultural growth
Pinduoduo initially challenged Alibaba and JD.com as a discount marketplace for group purchases. That focus enabled it to gain a lot of shoppers across China's lower-tier cities, and it capitalized on that momentum to launch more agricultural services.
Pinduoduo's farm-to-table expansion allowed farmers and small vendors to directly sell their products to online shoppers and bypass middleman retailers. That strategy, which required logistics upgrades and partnerships with farmers, enabled it to sell fresh produce at lower prices than traditional supermarkets.
During its latest conference call, Lei said that agriculture would remain at the "front and center" of Pinduoduo's long-term growth strategy. It expects those efforts to squeeze its near-term margins, but they will also likely widen its moat against Alibaba, JD, and other e-commerce competitors.
Its profitability is improving
When Pinduoduo went public in 2018, many investors were impressed by its revenue growth but scoffed at its staggering losses. But in 2021, the company turned profitable on a GAAP basis as it reined in its spending.
|
Metric |
FY 2018 (in Billions) |
FY 2019 (in Billions) |
FY 2020 (in Billions) |
FY 2021 (in Billions) |
|---|---|---|---|---|
|
Revenue |
$1.91 |
$4.33 |
$9.12 |
$14.74 |
|
Operating profit |
($1.57) |
($1.23) |
($1.44) |
$1.08 |
|
Net Income |
($1.50) |
($1.00) |
($1.10) |
$1.22 |
Data source: Pinduoduo.
Room for growth with a reasonable valuation
Analysts expect Pinduoduo's revenue and net income to rise 16% and 72% respectively this year. Next year, they expect revenue to rise 26% and net income to grow 48%.
Those estimates should be taken with a grain of salt since the COVID-related shutdowns and supply chain disruptions in China could still drag on for months and throttle Pinduoduo's near-term growth. Based on those expectations, Pinduoduo looks reasonably valued (but not extremely cheap) at 35 times forward earnings and four times this year's sales.
For reference, Alibaba trades at 17 times forward earnings and two times this year's sales. JD trades at over 100 times forward earnings (due to its elevated spending this year) but less than one times this year's sales.
Is Pinduoduo a buy now?
Pinduoduo's ability to thrive in China's crowded e-commerce market is admirable, especially since the company arrived much later than Alibaba and JD. Its dedicated focus on agriculture and rising profits also set it apart. However, Pinduoduo still can't be considered a bargain at these prices, and investors will likely avoid Chinese tech stocks in general as long as they face regulatory headwinds in China and delisting threats in the U.S.
Even if those issues are permanently resolved, I'd probably buy Alibaba or JD before Pinduoduo because they're fundamentally cheaper. Pinduoduo operates a solid business, but I wouldn't touch its stock unless it tumbles to even lower prices.
