It's been challenging for investors in Pinduoduo Inc (PDD 2.80%), China's up-and-coming e-commerce platform. In a little over a year, not only did the young company see its founder step down, its market capitalization fell by nearly 75%.
Under such circumstances, it'd be totally understandable to run away from such a stock. But the company's latest quarterly results also provide some good reasons for investors to be optimistic.
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Pinduoduo delivered another solid quarter
Pinduoduo was a loss-making company for most of its existence. In its early days, investors did not believe that the company would ever be profitable, as it had to compete against much larger players like Alibaba and JD.com. It wasn't until last year that the internet retail company could prove skeptics wrong with its first profitable year.
That said, the market still seems unsure whether Pinduoduo's profitability is sustainable. While it's arguably still early days for an e-commerce company, Pinduoduo once again proved itself with another profitable quarter. Here are some key highlights from the first-quarter 2022 results.
Revenue (excluding merchandise sales) rose 39% year-over-year to 23.7 billion yuan ($3.7 billion), thanks to higher revenue from online marketing services and transaction services. Net income came in at 2.6 billion yuan ($410.1 million), a turnaround from a loss of 2.9 billion yuan last year.
Both monthly active users (MAU) and active buyers reached all-time highs of 751 million and 882 million. The balance sheet remained strong with 95.2 billion yuan ($15.0 billion) in cash, cash equivalents, and short-term investments.
In short, Pinduoduo ended the first quarter with solid metrics across the board!
Pinduoduo's investment in user growth is paying off
In the past, Pinduoduo relied heavily on advertising and subsidies to grow its user base. For example, in 2020, the company spent around 41 billion yuan on sales and marketing when its gross profit was only 40 billion yuan. This kind of aggressive investment in user growth had been a norm for the company for many years.
The non-believers, understandably, condemned such a strategy. Their reasoning was simple -- users would come to Pinduoduo for the discounts, but they would inevitably leave when the subsidies ended. Pinduoduo's management, on the other hand, believed that it could retain these users by providing them with a competitve price and an entertaining shopping experience.
Fortunately, there are early signs that Pinduoduo's strategy is working. One evidence is that revenue (ex-merchandise sales) grew strongly even when the company reduced its sales and marketing expenses -- down 14% year over year-- indicating that users returned and spent more money on Pinduoduo's platform.
Besides, sales and marketing costs as a percentage of gross profit fell from 113% last year to 67% in the first quarter of 2022. In other words, the benefits of operating leverage are finally kicking in for the tech company, propelling it to another profitable quarter.
What to expect for Pinduoduo in the coming months
China's e-commerce industry is ruthlessly competitive. Besides the full-fledged marketplaces like Alibaba, Pinduoduo, and JD.com, newer players like Douying and Kuaishou have begun offering live-streaming and short video shopping lately.
Historically, Pinduoduo relied mainly on user growth to expand its business. But as it has now reached 882 million buyers, it needs new ways to grow the business.
To this end, the tech company is investing heavily to improve its user engagement and retention. It is continuously adding new product categories and has introduced services (such as short videos) to keep users engaged. Investors should expect sustained investments in these areas in the coming months.
Besides, Pinduoduo is betting heavily on agriculture as the next growth leg. For example, the e-commerce company subsidized farmers on commission and traffic to help them sell their agriculture products online. It has also partnered with the government and universitiesto promote the use of technology -- such as automation and artificial intelligence -- to improve the agriculture industry in China.
In short, Pinduoduo is trying to put behind those days when it grew by simply adding new users. Instead, the company is gradually pivoting to other means of monetizing its user base while also focusing on its investments in the agricultural space for its next growth phase. Investors should factor in these developments when assessing Pinduoduo's future performance.
