Pinduoduo (PDD -2.28%), China's third-largest e-commerce company by annual revenue, went public at $19 per American depositary share (ADS) on July 26, 2018. Its stock subsequently rallied to an all-time high of $202.82 on Feb. 17, 2021.

At the time, Pinduoduo impressed investors by growing faster than its two larger competitors, Alibaba and JD.com. But today, Pinduoduo's stock trades nearly 50% below that price at about $104. The bulls retreated as Pinduoduo's revenue growth cooled off, rising rates compressed its valuation, and U.S. regulators repeatedly threatened to delist all Chinese stocks.

Those challenges seem daunting, but I believe Pinduoduo is still a great growth stock for investors who can tune out the near-term noise and focus on its long-term potential.

An online merchant prepares an order on a laptop.

Image source: Getty Images.

A constantly evolving business model

Pinduoduo was founded in 2015 and initially differentiated itself from other shopping platforms by encouraging its shoppers to team up to score bulk discounts. It also generally sold cheaper products than Alibaba's Taobao, JD, and other leading online marketplaces. Those two strategies enabled it to grow rapidly across China's lower-tier cities.

Pinduoduo was initially criticized for its sales of low-quality and counterfeit products, but it cracked down on those unscrupulous sellers and secured more partnerships with first-party brands. It also started selling higher-quality products and capitalized on its growing brand awareness to challenge Alibaba and JD in China's top-tier cities. That aggressive expansion even drove Alibaba and JD to launch their own discount marketplaces.

Pinduoduo subsequently expanded its online agricultural platform that directly connected farmers to online shoppers. Its first-mover advantage in this niche market -- which it fed with investments in modernizing China's agricultural supply chains -- turned it into the country's largest online agricultural platform. It also enabled Pinduoduo to disrupt traditional grocers and online grocery delivery services with cheaper products.

Pinduoduo has now set its sights overseas with Temu, a cross-border marketplace that enables Chinese merchants to reach international buyers. Temu hit 50 million global installations in the first six months after its launch in September 2022. Rivals Shein and Wish took about three years to reach that milestone.

Robust revenue growth and soaring profits

Between 2019 and 2022, Pinduoduo's annual revenue more than quadrupled in dollar terms. Its operating and net profit margins turned positive in 2021 as it phased out its lower-margin first-party marketplace and reined in its spending. Its operating margins and net profits continued to rise over the subsequent two-and-a-half years.

Metric

2019

2020

2021

2022

Q1 2023

Q2 2023

Revenue

$4.33 billion

$9.12 billion

$14.74 billion

$18.93 billion

$5.48 billion

$7.21 billion

Operating margin

(28.4%)

(15.8%)

7.3%

23.3%

18.4%

24.3%

Net income

($1.00 billion)

($1.10 billion)

$1.22 billion

$4.57 billion

$1.18 billion

$1.81 billion

Data source: Pinduoduo. GAAP USD terms.

Analysts expect Pinduoduo's revenue and adjusted earnings per ADS to increase 50% and 29%, respectively, for the full year. That would be a significant acceleration from its 28% revenue growth in 2022 -- and counter the bearish notion that its high-growth days are over. By comparison, analysts expect Alibaba's revenue to rise just 8% and for JD to suffer a 2% sales decline in their current fiscal years.

Pinduoduo's growth has been driven by China's post-pandemic recovery, the expansion of its domestic and overseas marketplaces, and its brisk sales of fresh produce. China's antitrust crackdown on Alibaba in 2021 -- which ultimately barred the e-commerce leader from locking in merchants with exclusive deals, using aggressive promotions, and making unapproved investments -- gives Pinduoduo even more room to expand.

As for Temu, the overseas marketplace doesn't generate a lot of revenue for Pinduoduo yet, but it could gradually chip away at Amazon and other dominant overseas marketplaces with its discount products. That expansion could eventually reduce Pinduoduo's long-term dependence on the saturated Chinese e-commerce market.

Its stock is still reasonably valued

Pinduoduo's growth rates are impressive, and its stock still looks reasonably valued at 21 times next year's earnings. Alibaba and JD trade at about 12 times forward earnings, but they're both growing more slowly than Pinduoduo.

U.S. investors might be reluctant to buy Pinduoduo and its peers as long as a potential delisting of Chinese stocks remains on the table. But if you believe those tensions will ease and a compromise can be reached through tighter auditing standards, it might be a once-in-a-lifetime chance to load up on Pinduoduo's stock while it's still on sale.