When Pinduoduo (PDD 1.08%) went public in 2018, most investors hadn't heard about it. The few who did were skeptical about its long-term prospects. There were already two giants (Alibaba and JD.com) in the Chinese e-commerce market, so the 3-year-old company was probably another one of these wannabe e-commerce platforms that would fade over time.
Yet, Pinduoduo proved all the bears wrong as it has grown to become the second-largest e-commerce platform in China, with around 900 million active buyers. Let's delve into two compelling reasons why Pinduoduo should be on every investor's radar.
It executed incredibly well in recent quarters
Pinduoduo is probably one of the most underrated growth stocks. The e-commerce company grew revenue by 97%, 58%, and 46%, respectively, in 2020, 2021, and 2022. Last year, it generated 130.6 billion yuan ($18.9 billion) in revenue and 30.4 billion yuan ($4.4 billion) in operating profit. That's pretty impressive for a 7-year-old company!
Even as many investors thought we might have seen the best from Pinduoduo, it has delivered some mind-blowing numbers so far in 2023. Revenue jumped 58% and 66% in the first two quarters. On top of that, operating profit expanded by 222% and 46% during that period. That's nothing short of remarkable. By comparison, Alibaba and JD.com grew revenue by 14% and 8% in the latest quarter.
By focusing on providing low-priced products that are a good value for the money, Pinduoduo has reached the top tier of China's e-commerce industry. And now it's focused on improving the user experience. For example, customers can quickly return their products if they are unsatisfied with their purchase. In most cases, they will receive the refunds almost immediately.
What's more, the platform uses an artificial intelligence (AI) bot to monitor chats between sellers and customers. The bot will intercept and refund customers directly if the AI detects sellers deliberately trying to avoid honoring their promises. By focusing on delighting customers, Pinduoduo has delivered some outstanding performance.
Rapid expansion in overseas markets
Pinduoduo's enormous success in China has become a barrier for the young company to sustain its hyper-growth mode. It already had close to 900 million active Chinese buyers in 2022, so future growth needs to come from growing the wallet share of these users.
Pinduoduo decided to expand into the U.S. market in September last year via its Temu site to address the growth issue. That move, while still less than a year in action, has opened a new chapter for the young company. Here are some reasons to be optimistic about Temu.
Firstly, Temu can leverage Pinduoduo's know-how and supply chain strength to offer overseas consumers a hard-to-beat shopping experience: a wide selection of products at rock-bottom prices. Besides, with Pinduoduo's strong balance sheet -- it has 178 billion yuan ($24.8 billion) in cash, cash equivalents, and short-term investments -- Temu has all the money it needs to invest in user acquisition and subsidies.
More importantly, Pinduoduo's management is taking this venture very seriously, which explains the recent appointment of Jiazhen Zhao as the co-CEO. Post-appointment, Chairman and co-CEO Lei Chen will focus on global expansion, while Jiazhen will be responsible for the Chinese business.
While it's still early days, Temu has already amassed over 100 million active users in the U.S. as of May. Besides, the South China Morning Post reported that Temu is already available in 38 countries, including the United Kingdom, Australia, New Zealand, Japan, and others. It has also entered the Philippines, a market where Sea Limited's Shopee is the dominant player.
Now, there is no guarantee that Temu will achieve the same success overseas as its sister platform did in China. Still, given Pinduoduo's track record, investors should closely monitor its latest venture.
What it means for investors
The last few quarters have been challenging for most e-commerce companies. Pinduoduo is one of the rare companies that has continued to deliver outstanding numbers. It is even more impressive if we consider that Pinduoduo was already a large company, generating $19 billion in revenue in 2022.
As Pinduoduo deepens its penetration in the Chinese e-commerce business and expands globally via Temu, it is well-positioned to sustain its high growth rates for a while. All said, it's a company that investors (especially the growth investors) should watch.