If asked to name an e-commerce company, most investors will resort to names like Amazon, Shopify, Alibaba, and MercadoLibre. These are good answers, since all these companies have become successful on their turf.
Still, most investors would have left out one name that has become as successful as these incumbents but remains relatively low-profile. This article aims to bring the company -- the young and rising PDD Holdings (PDD 0.90%), better known as Pinduoduo -- onto investors' radar.
An impeccable track record of growth
Founded in 2015, Pinduoduo had an unprecedented rise to become one of China's top three e-commerce platforms. Consider this. Alibaba and JD.com took nine and 13 years, respectively, to reach $100 billion in gross merchandise value (GMV). Comparatively, Pinduoduo achieved that in less than four years, by 2019. That year, it delivered a revenue of 30 billion yuan ($4.3 billion).
But it didn't stop there. By 2022, revenue had already reached 131 billion yuan ($18.9 billion). Pinduoduo's rise has resulted from having the right strategies and executing them well over time. For example, the company built its platform as a mobile-first when incumbents like Alibaba and JD.com grew their businesses mainly in the PC era, capturing new users who came online for the first time via cheap smartphones.
Pinduoduo also focused intensively on low prices, which attracted early users from rural areas. This low-price strategy became its hallmark as Pinduoduo expanded beyond its early cohort into the cities in recent years.
On top of that, Pinduoduo has used the proper marketing techniques at different stages of its development. For instance, in the early days, it encouraged existing customers to share deals and coupons with family and friends via WeChat to grow its user base. But as it gained scale, it started advertising nationally on TV to build consumer awareness and attract even more customers.
In short, Pinduoduo has demonstrated an incredible track record of execution in China. Now, it is using its experience over the years to build a cross-border e-commerce business (more in the next section).
Expanding into overseas markets
Pinduoduo's hyper-growth rate over the years means it is getting closer to the ceiling in its home market. It can still grow its revenue by expanding into new categories to capture a more significant customer wallet share. Still, it is unlikely to sustain its high growth rate unless it finds a new growth avenue.
Enter Temu. This online marketplace offers people a wide range of discounted products. Launched initially in the U.S. in September 2022, Temu uses Pinduoduo's experience and supply chain capabilities to provide products to overseas customers at rock-bottom prices. Temu also offers free standard shipping on all orders (free express shipping on orders above $129), guaranteed delivery time, 90-day free returns, and other perks to attract and retain customers.
While it's still early days, there are signs that the company is heading in the right direction. For example, Temu is already in 40 countries just a year after its launch. It has consistently occupied the top three positions of app downloads in the Google Play Store and Apple App Store while already surpassing 100 million active users in the U.S. by May 2023.
Still, there is plenty of work to do before Temu can become as successful overseas as its companion platform Pinduoduo is in China. For example, it needs to overcome its long delivery time (4-12 days for express shipping) before it can threaten incumbents like Amazon in the U.S. market. It also has to deal with other issues like low-quality and counterfeit products on its platform.
In other words, it will be a marathon (rather than a sprint) for Temu to build a sustainable cross-border e-commerce business. Fortunately, with its extensive supply chain, solid management know-how, and colossal cash hoard -- 203 billion yuan ($27.8 billion) in cash, cash equivalents, and short-term investments -- it has a decent shot at reaching that goal.
Pinduoduo is the stock to watch
It is rare to have a company that came from nowhere to dominate an industry with multiple incumbents. It's even rarer for the young company to achieve that feat in less than eight years.
Besides, Pinduoduo is now sitting on another vast opportunity to repeat its success in China in the overseas market via Temu. It's not a sure thing yet, but it's a massive optionality for investors. With so many good things going on for the company, investors should give it a closer look.