Pinduoduo Inc (PDD -1.37%), a leading e-commerce company in China, has delivered outstanding growth since its initial public offering (IPO). From 2018 to 2021, its revenue grew more than sevenfold, to 93.9 billion yuan ($14.7 billion).
Still, investors are more interested in whether there's more growth ahead for Pinduoduo. Fortunately, this young company still wants to grow -- and its recent overseas expansion demonstrates such ambition.
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A phenomenal track record of execution
There aren't many companies that can boast about having a track record similar to Pinduoduo's recent run. Founded in 2015, the company took four years to reach a gross merchandise value (GMV) of $100 billion. Comparatively, Alibaba and JD.com took nine and 13 years, respectively, to get there.
Pinduoduo's rapid rise resulted from developing the right strategies and executing them well. For instance, its mobile-first e-commerce platform targets lower-income groups in China, which competitors like Alibaba and JD.com largely neglected. These potential customers already had access to the internet through their smartphones, so buying online was a natural step forward.
Pinduoduo focuses on providing low-priced (and value-for-money) products to attract and retain these users. On top of that, the tech company gamifies the shopping experience to improve user engagement. For example, users grow virtual fruits and receive those fruits in real life. Early customers loved it, and Pinduoduo grew like a weed in less-developed areas of China.
As it gained a foothold in these rural areas, Pinduoduo moved its focus into the more affluent customer groups by targeting modern cities across China. The company convinced these higher-income customers to use its service with its intelligent marketing strategies, such as subsidizing branded products like iPhones and continuously expanding its product catalog to cover all product categories.
Over time, Pinduoduo grew into a leading e-commerce platform in China, with close to 870 million annual active buyers. While this rapid growth is remarkable, it also means that Pinduoduo is getting closer to the ceiling in the Chinese market (China's population is 1.4 billion). But as a young company, Pinduoduo is eager to keep growing, and it plans to expand into overseas markets to continue its success.
Why overseas expansion makes sense
There are many good reasons for Pinduoduo to move into the overseas market. The most obvious one is to keep maintain growth by expanding its total addressable market (TAM) while giving young and rising talents more opportunities to take on more significant responsibilities.
Besides, overseas expansions help Pinduoduo allocate its excess capital to generate shareholders' wealth. To this end, the young company has a solid balance sheet with 119 billion yuan ($17.8 billion) in cash, cash equivalents, and short-term investments. It has also been profitable over the last five quarters, giving it the necessary firepower to invest.
Equally important, Pinduoduo has the necessary operational advantages to support its overseas expansion, thanks to its relationships with Chinese manufacturers. For example, Pinduoduo can source low-cost but high-quality products directly from the best manufacturers in China and ship them directly to end customers. In doing so, the e-commerce company removes the intermediaries, allowing it to pass on the savings to customers.
Pinduoduo faces a tough road ahead in the United States
On Sept. 1, Pinduoduo launched its cross-border e-commerce platform TEMU in the United States. While unexpected -- many thought the company would expand further in Asia, which is more similar to the Chinese market -- this move is not entirely surprising. After all, the United States is the largest retail market globally.
Still, Pinduoduo's U.S. push will not be easy since the U.S. market is highly competitive with large incumbents like Amazon, Walmart, and Shopify. The newcomer needs to convince users to try its service and it also needs to work hard to retain them (hopefully with a great shopping experience). This won't be easy for Pinduoduo. For instance, an Amazon Prime customer accustomed to Amazon's huge selection, low prices, and convenience will have little incentive to switch. This conversion might prove even more challenging for customers who are part of a membership program, as Pinduoduo will not only have to compete with long-standing name brand recognition, but also the numerous benefits some customers enjoy from memberships through these companies.
It is still too early to say whether Pinduoduo can carve up a market in the U.S. Still, we can make educated guesses on how the company could appeal to U.S. consumers. One thing is that Pinduoduo will likely bring its rock-bottom pricing to consumers thanks to its direct relationship with factories in China. It can also offer plenty of selection of products to consumers by leveraging its existing supply chain of 11 million merchants in China.
However, one major downside to Pinduoduo's offering is its slower delivery times, since it does not have the necessary logistical infrastructures in the U.S. for faster shipping like that of Amazon, for example. Presently, the company promises to deliver products within 7-15 business days. The shipping cost will be zero if the order value exceeds $29 or $2.99 for anything less than that. But, again, that pales in comparison to Amazon Prime's free one-day delivery (and even same-day delivery for eligible items).
In short, Pinduoduo needs plenty of time to experiment and see what works in the U.S. market. Eventually, it needs to develop its unique value proposition to succeed in the U.S.
What this means for investors
Pinduoduo had great success in China, and investors might have high hope for the young company as it ventures overseas. Still, it is too early to count on its overseas expansion to move the needle. In simpler terms, don't rush into buying Pinduoduo stock today.
Instead, investors should closely monitor Pinduoduo's execution. If they see a clear sign that Pinduoduo is gaining good traction in the U.S. based on metrics such as GMV and user growth, they can start buying the stock.
