Pinduoduo (PDD -5.91%), one of the largest e-commerce companies in China, went public at $19 per American depositary share (ADS) on July 26, 2018. It eventually hit an all-time high of $202.82 on Feb. 17, 2021, during the buying frenzy in growth stocks, but shares now trade at about $70.

A $1,000 investment in Pinduoduo's initial public offering (IPO) would have briefly grown to nearly $10,700 before shrinking back to about $3,700 today. Nevertheless, a 270% gain in less than five years is still pretty impressive. Pinduoduo also easily outperformed its closest competitors -- Alibaba and JD.com -- during the same period.

An online merchant gets ready to ship a package.

Image source: Getty Images.

What happened over the past five years?

Pinduoduo was founded in 2015, making it a much younger company than Alibaba or JD. However, Pinduoduo quickly carved out a high-growth niche in the crowded Chinese e-commerce market by selling cheap products and encouraging shoppers to team up on social media platforms for bulk purchases to score steeper discounts.

That approach made Pinduoduo popular among lower-income shoppers across China's lower-tier cities, and the company capitalized on its success by launching an online agricultural platform for farm-to-consumer deliveries. That streamlined strategy enabled it to sell fresh produce at lower prices by cutting out the middlemen retailers.

Pinduoduo's number of annual active buyers more than doubled from 418.5 million to 881.9 million between the fourth quarter of 2018 and the first quarter of 2022 (the final time it disclosed that key growth metric). Its total number of monthly active users surged from 272.6 million to 751.3 million during the same period.

Between 2018 and 2022, Pinduoduo's annual revenue grew at a stunning compound annual growth rate (CAGR) of 77% in USD terms. Its operating margin also turned positive on a generally accepted accounting principles (GAAP) basis, and it generated consistent annual profits over the past two years.

Period

2018

2019

2020

2021

2022

Q1 2023

Revenue

$1.91 billion

$4.33 billion

$9.12 billion

$14.74 billion

$18.93 billion

$5.48 billion

Operating margin

(82.3%)

(28.4%)

(15.8%)

7.3%

23.3%

18.4%

Net income

($1.50 billion)

($1.00 billion)

($1.10 billion)

$1.22 billion

$4.57 billion

$1.18 billion

Data source: Pinduoduo. Generally accepted accounting principles (GAAP) USD terms.

Pinduoduo's revenue growth gradually cooled off as its business matured, and the Chinese economy was rattled by intermittent COVID lockdowns from 2020 to 2022. However, it still grew at a much faster clip than either Alibaba or JD.com. It also likely benefited from China's antitrust crackdown on Alibaba, which forced the e-commerce leader to end its exclusive deals with merchants and rein in its loss-leading promotions.

Pinduoduo's profitability also improved as economies of scale kicked in, and it phased out its lower-margin first-party marketplace. Those soaring profits silenced the bears, who had claimed its discount business model was unsustainable.

What will happen over the next five years?

Pinduoduo has already become China's third-largest e-commerce company by revenue, but it could still have plenty of room to grow over the next five years. In China, it recently launched a new 10 billion yuan ($1.4 billion) "Ecosystem Initiative" to provide more support to its highest-rated sellers, weed out its lower-rated ones, and optimize its supply chain capabilities.

It's also investing a portion of that cash into digital upgrades for China's agricultural supply chain. And planting those roots (especially in rural areas) could support the long-term expansion of its online agricultural platform.

Pinduoduo could still have plenty of room to grow outside of China too. Last year, it launched Temu -- a cross-border marketplace that enables its Chinese sellers to ship their products to shoppers in the U.S., Europe, and other overseas markets. Temu is already one of the most downloaded shopping apps in the U.S.

And Temu could continue to expand rapidly as it pulls shoppers away from similar cross-border discount marketplaces like Alibaba's AliExpress, ContextLogic's Wish, and Shein. It could even challenge Amazon's third-party marketplace.

During Pinduoduo's latest conference call, VP of Finance Jun Liu said Temu was still an "early stage" project that only made a "small" contribution to revenues. But over time, Temu could significantly diversify its business away from China.

However, there needs to be improvements to the strained relationship between the U.S. and China before that can happen. Pinduoduo's main app was already suspended by Alphabet's Google over security concerns earlier this year, and Temu might face similar problems in the future. And just like other Chinese companies, Pinduoduo still faces unresolved delisting threats in the U.S. market.

Pinduoduo could still have room to run

Analysts expect Pinduoduo's revenue and net income to both grow at a CAGR of 24% between 2022 and 2025. That would represent a slowdown from the past five years, but it would still be growing a lot faster than Alibaba or JD.

At $70 per share, Pinduoduo also looks surprisingly cheap -- just 16 times forward earnings. So if the Chinese market stabilizes, and the tensions between the U.S. and China ease, Pinduoduo has the makings of a great investment for long-term investors.