Pinduoduo (PDD 0.20%) and Bilibili (BILI 0.39%) both recently dazzled investors with their latest earnings reports. Pinduoduo's stock surged 13% on Nov. 28 after the Chinese e-commerce company's third-quarter numbers easily cleared analysts' expectations. Bilibili's stock soared 22% on Nov. 29 after the gaming, digital media, and e-commerce company's Q3 earnings also comforatably beat analysts' estimates.

Is it safe to buy either of these Chinese tech stocks right now as their home market grapples with slowing economic growth, COVID-19 lockdowns, social unrest, and unpredictable crackdowns and regulations? Let's reexamine both companies, their near-term challenges, and their valuations to decide.

Person using notebook computer in a cafe.

Image source: Getty Images.

The differences between Pinduoduo and Bilibili

Pinduoduo is China's third-largest e-commerce company, after Alibaba (BABA -0.65%) and JD.com (JD -2.60%). It initially carved out a niche by selling discount products in lower-tier cities, and it encouraged shoppers to team up to score even steeper discounts on bulk purchases. It subsequently started to sell fresh produce at competitive prices by facilitating farm-to-table purchases, which skipped over middleman retailers like traditional grocery stores and supermarkets.

Pinduoduo's status as an underdog in the Chinese e-commerce market has largely shielded it from the antitrust scrutiny that has throttled Alibaba's growth over the past two years. Pinduoduo has also even likely benefited from the draconian restrictions against Alibaba, which prevent Taobao and Tmall from locking in merchants with exclusive deals or aggressively leveraging loss-leading discounts to attract new customers.

Bilibili's streaming video platform hosts a wide range of licensed and user-created content. It's a popular destination of ACG (anime, comics, and gaming) content, and it operates on a freemium model: Free users can watch ad-supported content, while its paid users gain access to ad-free streams and unlock additional content. It also publishes video games, hosts digital comics online, and operates an e-commerce marketplace (which is integrated into Alibaba's Taobao) for tie-in merchandise.

Bilibili's popularity among Gen Z users enabled its streaming video platform to continue to gain new advertisers and flourish in the shadow of larger premium platforms like Tencent Video and iQiyi. Its gaming business (26% of its revenue last quarter) also continued growing -- even as Chinese regulators implemented tighter playtime restrictions for minors and limited their approvals of new video game licenses.

Which company is growing faster?

Pinduoduo and Bilibili both experienced decelerating sales growth over the past three years as China's economic growth cooled off. Bilibili's growth was further hampered by the video game restrictions in China, and by an unpredictable crackdown on user-created and live-streaming videos.

Company

2019

2020

2021

First 9 months of 2022

Pinduoduo revenue growth (YOY)

130%

97%

58%

36%

Bilibili revenue growth (YOY)

64%

77%

62%

16%

Data source: Company earnings reports. YOY = Year-over-year.

However, Pinduoduo's year-over-year revenue growth actually accelerated over the past three quarters as it ramped up its promotions and expanded its agricultural business. Its farm-to-table sales also likely benefited from the unpredictable COVID-19 lockdowns, which shut down many brick-and-mortar supermarkets over the past year. Analysts expect its revenue to rise 38% for the full year, so it's still growing at a much faster clip than Alibaba or JD.

Bilibili's year-over-year revenue growth also accelerated in Q3, driven by the steady expansion of its value-added services (VAS), gaming, advertising, and e-commerce segments. Its total number of monthly active users (MAUs) increased 25% year over year to 332.6 million, while its total number of monthly paying users grew 19% to 28.5 million.

Those robust revenue and user growth rates, which are a lot better than Tencent's, indicate Bilibili still dominates its niche market of ACG content for Gen Z users. Analysts expect its revenue to rise 13% for the full year.

The profitability and valuations

Pinduoduo was drowning in red ink throughout 2019 and 2020, but it turned profitable in 2021 and the first three quarters of 2022 as it reined in its spending and phased out its lower-margin first-party merchandise sales. Analysts expect its net income to nearly quadruple this year.

Bilibili remains unprofitable, and its net loss widened year over year in the first nine months of 2022. Analysts expect it to stay unprofitable for the foreseeable future, which raises tough questions regarding its ongoing commitment to the low-margin streaming video, gaming, and e-commerce markets.

Bilibili might narrow its losses by expanding its base of paid subscribers, but that could be tough considering that it's only converted fewer than 9% of its MAUs to paid monthly users thus far. Its gaming and streaming video businesses also remain exposed to regulatory headwinds.

Pinduoduo currently trades at just 4 times next year's sales and 24 times forward earnings. Bilibili trades at less than 2 times next year's sales. Bilibili might initially seem cheaper, but it arguably deserves to trade at a discount because it's growing slower, it's unprofitable, and it faces plenty of near-term and long-term headwinds.

Pinduoduo seems reasonably valued, its profits are soaring, and it's growing faster than its two larger rivals while attracting a lot less regulatory scrutiny. Those strengths make it a much more well-rounded investment in the Chinese economy than Bilibili.