Pinduoduo's (PDD +1.16%) stock surged 15% on Aug. 29 following its second-quarter report. The Chinese e-commerce company's revenue rose 36% year over year to 31.44 billion yuan ($4.69 billion), which beat analysts' estimates by $1.25 billion. Its adjusted earnings grew 165% to 7.54 yuan ($1.13) per American depositary share, which also cleared expectations by $0.72.
Those growth rates were impressive, but Pinduoduo's stock remains nearly 70% below its all-time high from last February. So should investors take a second look at the third-largest e-commerce player in China?
Image source: Getty Images.
It's outperforming its larger peers
Pinduoduo's revenue grew at its fastest rate in three quarters, which suggests it's bucking the economic slowdown in China. By comparison, JD.com's (JD +0.60%) and Alibaba Group Holding's (BABA +1.07%) Chinese commerce units both struggled with decelerating revenue growth over the past year.
During the second quarter, Pinduoduo generated 80% of its revenue from its online marketing services and others segment, which charges third-party sellers fees to list their products on its marketplace. The remaining 20% mainly came from its transaction services revenue. It once generated significant revenue from its first-party merchandise sales, but it phased out that lower-margin business in the second half of 2021. Here's how its two remaining businesses fared over the past year:
|
Metric |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
Q2 2022 |
|---|---|---|---|---|---|
|
Online marketing services and others revenue growth (YOY) |
64% |
44% |
19% |
29% |
39% |
|
Transaction services revenue growth (YOY) |
164% |
161% |
108% |
91% |
107% |
|
Total revenue growth (YOY) |
89% |
51% |
3% |
7% |
36% |
Data source: Pinduoduo. YOY = Year over year.
CEO Lei Chen attributed its second-quarter acceleration to a "recovery in consumer sentiment in the second quarter," especially during the annual 618 shopping festival in June. JD.com launched the first 618 festival, which is comparable to Alibaba's Singles Day in November, back in 2010 to commemorate the anniversary of its founding. But like Singles Day, the 618 festival subsequently evolved into an annual shopping festival for China's other e-commerce platforms.
Yet JD.com's revenue rose just 5% year over year in its latest quarter, compared with its 18% growth in the previous quarter and 26% growth a year earlier. Alibaba's Chinese commerce revenue fell 1% year over year last quarter.
NASDAQ: PDD
Key Data Points
But it eliminated two key growth metrics
Pinduoduo's revenue growth is impressive, but it notably stopped reporting its year-over-year growth in monthly active users (MAUs) and active buyers in the second quarter. The abrupt omission of those two core growth metrics, which the company didn't even address during its conference call, is a bit frustrating.
|
Metric |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
Q2 2022 |
|---|---|---|---|---|---|
|
MAUs growth (YOY) |
30% |
15% |
2% |
4% |
NA* |
|
Active buyers growth (YOY) |
24% |
19% |
10% |
7% |
NA* |
Data source: Pinduoduo. *Not available.
Pinduoduo likely omitted those metrics to dispel the notion that it's "larger" than JD.com, which ended last quarter with 580.8 million annual active customers, or nearly as big as Alibaba, which surpassed 1 billion annual active customers in China last year.
Pinduoduo ended the first quarter of 2022 with 881.9 million annual active buyers, but it primarily facilitates smaller third-party purchases (especially groceries) from lower-income consumers. That's why JD.com's retail business and Alibaba's Chinese commerce segment still generated 7.4 times and 4.5 times as much revenue as Pinduoduo, respectively, in their latest quarters. Therefore, highlighting its growth in revenue instead of its users could let investors know it has more room to grow than JD.com and Alibaba. It could also reduce Pinduoduo's exposure to antitrust regulators.
Improving scale and profitability
Pinduoduo was deeply unprofitable until 2021, when it turned profitable by reining in its spending and phased out its first-party merchandise sales. Its operating margins and net profits continued to rise in the first half of 2022.
|
Metric |
FY 2019 |
FY 2020 |
FY 2021 |
1H 2022 |
|---|---|---|---|---|
|
Revenue |
$4.33 billion |
$9.12 billion |
$14.74 billion |
$8.25 billion |
|
Operating income (loss) |
($1.23 billion) |
($1.44 billion) |
$1.08 billion |
$1.62 billion |
|
Operating margin |
(28.4%) |
(15.8%) |
7.3% |
19.6% |
|
Net income |
($1 billion) |
($1.1 billion) |
$1.22 billion |
$1.72 billion |
Data source: Pinduoduo. FY = fiscal year. 1H = first half.
By comparison, JD Retail reported a slim operating margin of just 3.5% last quarter, since it generates most of its revenue from its lower-margin first-party marketplace. Alibaba ended its latest quarter with an operating margin of 12% as its unprofitable cloud and digital media businesses offset the higher margins of its e-commerce marketplaces.
Analysts expect Pinduoduo's revenue to increase 30% for the full year as its net income surges 71%. Those are impressive growth rates for a stock that trades at about 48 times forward earnings and five times this year's sales.
Is it time to buy Pinduoduo?
Pinduoduo's valuations still look surprisingly reasonable for three reasons: Investors are still largely bearish on e-commerce stocks in a post-lockdown world, rising rates are keeping them away from higher-growth tech stocks, and the delisting concerns have cast a dark cloud over all Chinese equities. U.S. and Chinese regulators recently made some progress toward avoiding mass delistings, but those other two headwinds won't wane anytime soon.
I believe investors can nibble on Pinduoduo right now because it's too cheap to ignore. But they should keep the near-term risks in mind and brace for a lot of near-term volatility as Chinese e-commerce and tech stocks remain out of favor.
