Pinduoduo's (PDD 2.80%) stock surged 18% on Nov. 28 after the Chinese e-commerce giant posted its third-quarter earnings report. Its revenue rose 94% year over year to 68.84 billion yuan ($9.44 billion), beating analysts' estimates by $2.02 billion. Its adjusted net income climbed 37% to 17.03 billion yuan ($2.33 billion), or $1.55 per share, clearing the consensus forecast by $0.39.
Those growth rates were explosive, but it's stock has also rallied over 90% in the past 12 months. Let's see why investors have fallen in love with Pinduoduo and if it's too late to hop aboard the bullish bandwagon.
Image source: Getty Images.
Meet China's fastest-growing e-commerce leader
Pinduoduo is China's third largest e-commerce company by annual revenue after Alibaba and JD.com, but it's growing at a much faster clip than its two larger rivals. Between 2018 and 2022, Pinduoduo's annual revenue boasted a staggering compound annual growth rate (CAGR) of 77% in terms of U.S. dollars.
The bears initially claimed Pinduoduo was just another hypergrowth Chinese e-commerce company which would eventually burn out without ever turning a profit. But on a generally accepted accounting principles basis (GAAP) basis, Pinduoduo's operating margins turned positive, and it's stayed profitable for nearly three consecutive years. It crossed that milestone by scaling up its business, phasing out its lower-margin, first-party marketplace, and streamlining its business.
|
Period |
2018 |
2019 |
2020 |
2021 |
2022 |
9M 2023 |
|---|---|---|---|---|---|---|
|
Revenue |
$1.91 billion |
$4.33 billion |
$9.12 billion |
$14.74 billion |
$18.93 billion |
$21.76 billion |
|
Operating Margin |
(82.3%) |
(28.4%) |
(15.8%) |
7.3% |
23.3% |
22.9% |
|
Net Income |
($1.50 billion) |
($1.00 billion) |
($1.10 billion) |
$1.22 billion |
$4.57 billion |
$5.04 billion |
Data source: Pinduoduo. GAAP results.
For the full year, analysts expect its revenue to surge 83% (in yuan terms) as its operating margin rises to 24.2%. From 2022 to 2025, they expect its revenue to continue growing at a CAGR of 35% as its earnings per share (EPS) rise at a CAGR of 29%.
By comparison, analysts expect Alibaba's revenue to grow 9% annually over the next three fiscal years. JD's revenue is expected to rise at a CAGR of just 6% from 2022 to 2025. We should take these estimates with a grain of salt, but they do showcase Pinduoduo's stronger growth prospects for the foreseeable future.
Why did Pinduoduo grow so rapidly?
Pinduoduo was only founded eight years ago, but it's grown like a weed for three simple reasons. First, it carved out a niche with a deep-discount marketplace which encouraged its shoppers to team up to score bulk discounts. That approach enabled it to gain hundreds of millions of shoppers across China's lower-tier cities.
Second, Pinduoduo capitalized on its initial growth spurt to build an online agricultural platform which directly sold fresh produce from farmers to consumers. That farm-to-table approach cut out middlemen retailers and turned it into China's largest online marketplace for fresh produce.
Lastly, China's antitrust regulators cracked down on Alibaba and restricted it from locking in merchants with exclusive deals, using aggressive promotions, and making unapproved investments. Alibaba's setbacks gave Pinduoduo more room to grow.
Does Pinduoduo still have a bright future?
During Pinduoduo's latest earnings call, co-CEO Lei Chen attributed the company's robust growth over the past year to the "continuous recovery" of the Chinese market. Looking ahead, this momentum should continue as the company dominates the country's online discount and agricultural markets. It's also been expanding its lineup of pricier products to target Alibaba and JD's core shoppers across China's higher-tier cities.
Pinduoduo has set its sights overseas with Temu, a new cross-border marketplace which enables its Chinese sellers to reach overseas buyers. Temu was launched last July, and it's racked up 40.5 million downloads as of Sept. 2023. It became the most downloaded shopping app across multiple markets, including the United States, as it attracted bargain hunters with its deep discounts.
Pinduoduo has been cagey about Temu's exact growth rates, but the new business could reduce its long-term dependence on the Chinese market and enable it to further challenge Alibaba's AliExpress, Amazon, and other cross-border marketplaces.
Its stock still looks cheap relative to its growth potential
Pinduoduo stock has soared this year, but it's still 30% below its all-time high while trading at just 23 times forward earnings estimates. It might be pricier than Alibaba or JD, which both trade at less than 10 times forward earnings, but it's also growing much faster.
The stock will experience volatility given near-term concerns about China's economic recovery and the prickly trade tensions between the U.S. and China. But Pinduoduo still has plenty of long-term potential, so it's not too late to buy this e-commerce stock.
