Pinduoduo (PDD 1.75%) was just a 6-year-old e-commerce company when I first bought stock back in 2021 in this commerce site that leverages social interactions as part of its sales pitch. Despite its relatively young age, Pinduoduo had achieved some remarkable results up to that point, becoming one of the top three players in the Chinese e-commerce industry. Still, it was a risky company for investors to consider then. The founder had stepped down and the technology industry was facing enormous scrutiny from the Chinese government.
I took the risk and bought the stock at a time when everyone was avoiding Chinese companies. So far, my contrarian decision has paid off. The stock is up more than 51% in 2022 (although it's still down from all-time highs reached in February 2021).
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Pinduoduo's execution has been outstanding
Pinduoduo's rise was nothing short of remarkable. It got its start helping facilitate interactions between individual buyers of farm produce to help them make bulk purchases from growers that were cheaper (and better quality) than what could be purchased in stores, even though it was individually delivered to buyers' homes. From zero revenue in 2015, the company grew the types of products it could offer to include fashion, household items, and electronics, and it grew its operations to become a giant with 72.6 billion yuan ($11.4 billion) in revenue in 2021. It also reported a net profit of 7.8 billion yuan ($1.2 billion) that year, which is another feat if you consider that very few high-growth companies deliver profits at this stage in their development.
Pinduoduo continued to win in 2022. In the third-quarter result, the tech company reported a 65% increase in revenue to 35.5 billion yuan ($5 billion) and a 546% jump in net profit to 10.6 billion yuan ($1.9 billion). Such figures are even more impressive when you see that top Chinese e-commerce sites like Alibaba Group had a tough time in 2022.
Pinduoduo's recent performance highlighted the beauty of its business model, which was to focus fanatically on bringing value-for-money products to customers. Over time, consumers became more familiar with buying low-priced products from Pinduoduo's platform. Naturally, they came back for more.
It also helped that, as the Chinese economy slowed down because of scattered and numerous COVID-19-related lockdowns throughout the year, Chinese consumers became more conscious of their spending. Pinduoduo benefitted greatly as consumers tightened their belts.
Pinduoduo is exploring new business opportunities
Pinduoduo's rapid rise means it can depend much less on growing its user base to sustain its growth machine. By the end of 2021, it reached 869 million active buyers. From here on, it has to rely more on increasing average spending per buyer to grow its business.
Understandably, the company is exploring new ways to keep the company growing. And two new areas look promising.
The first is Pinduoduo's decision to expand its operations in the Chinese agriculture sector. While it has always relied on selling agriculture products on its platform, the tech company is even more focused in become a leading agritech company. In other words, Pinduoduo wants to become the preferred technology solution provider for the whole agriculture supply chain, from the farmers to the supply chain and finally ending at the consumers.
Another exciting business area is Pinduoduo's recent expansion into the overseas e-commerce market via its Temu app. While it's still early days -- Temu began selling products on Sept. 1, and the company has not publicly shared any performance metrics -- investors can still gauge the progress of Temu indirectly. One simple but valuable metric is monitoring the app download ranking on Apple App Store and Alphabet's Google Play Store using SensorTower. And here are some statistics. On Dec. 1, Temu ranked first in the Apple App Store and Google Play Store for all free downloads. Temu app downloads came ahead of Instagram, WhatsApp, and TikTok on that particular day. Besides, Temu has consistently been in the top three positions throughout November.
Still, the app's ranking (while helpful) is one of the many indicators to monitor Temu's progress. For example, the download ranking shows that Temu is gaining popularity among American users. But it doesn't illustrate anything about engagement and retention. So that's an area investors will want to find out more about in the coming quarters.
Pinduoduo has plenty of firepower at its disposal
Pinduoduo has plenty of opportunities to sustain its growth machine. It must invest heavily in the coming quarters (and potentially years) to benefit from these opportunities.
Fortunately, Pinduduo has plenty of financial resources to deploy. As of Sept. 30, it reported 137.8 billion yuan ($19.4 billion) in cash, cash equivalents, and short-term investments and only 15.7 billion yuan ($2.2 billion) in debt. Moreover, its profitable e-commerce business will continuously add money to its war chest. In 2021 alone, it generated 28.8 billion yuan ($4.5 billion) in operating cash flow.
While Pinduoduo does not lack the resources to invest in growth, investors can't be sure that these investments will be successful. For example, the e-commerce market in the United States is highly competitive, with incumbents like Amazon and Walmart trying hard to defend their turfs. The newcomer has to deliver enormous customer value to grow market share.
I don't have a crystal ball, so I can't predict the outcome of these new investments. But based on the company's previous track record, I'm willing to hold onto my stock in the coming months (or even years) to watch the process unfold and hopefully gain from it.
