The Chinese e-commerce powerhouse, Pinduoduo, has plenty of potential to offer. Pinduoduo’s (NASDAQ: PDD) stock saw an impressive 19% jump on May 26 following the company’s strong first-quarter earnings report. The company’s revenue grew 58% compared to the previous year, reaching 37.64 billion yuan ($5.48 billion), surpassing analysts’ predictions by $920 million. Similarly, its adjusted net income saw a staggering 141% increase to 10.13 billion yuan ($1.47 billion), or $1.01 per American depositary share (ADS), beating the consensus estimate by $0.38.
With Pinduoduo demonstrating much faster growth than its top two e-commerce rivals, Alibaba (NYSE: BABA) and JD.com (NASDAQ: JD), the question is whether it’s still a good time to invest in this stock after its 42% rally in the past year.
What’s Behind Pinduoduo’s Rapid Growth?
Founded in 2015, Pinduoduo quickly found a foothold against Alibaba and JD by offering discounted goods throughout China’s lower-tier cities. It incentivized shoppers to collaborate via social media platforms to secure bulk discounts.
Taking advantage of its initial growth, Pinduoduo ventured into the fresh produce market. However, unlike Alibaba and JD, which run their physical supermarkets, Pinduoduo facilitated direct links between farmers and consumers through its logistics network. This innovative approach led to Pinduoduo becoming China’s largest online agricultural platform.
After securing its place as China’s third-largest e-commerce player (based on annual revenues), trailing only Alibaba and JD, Pinduoduo extended its reach into China’s wealthier cities by offering premium branded products. Additionally, it stepped into the cross-border discount marketplace with Temu, a platform connecting Chinese sellers with overseas buyers, challenging Alibaba’s AliExpress and ContextLogic’s Wish.
When Pinduoduo went public in 2018, many critics wrote it off as just another unprofitable Chinese e-commerce player soon to be eclipsed by Alibaba and JD. However, the past four years have told a different story.
Pinduoduo’s revenues skyrocketed as its discount and agricultural marketplaces attracted hundreds of millions of customers. Its margins grew as it leveraged economies of scale and phased out its first-party lower-margin market in the latter half of 2021. It’s likely that the company also benefited from China’s antitrust crackdown on Alibaba, which forced the market leader to cease exclusive agreements with merchants and curtail its aggressive loss-leading promotions.
What Lies Ahead for Pinduoduo?
During the earnings call, Pinduoduo’s new co-CEO, Jiazhen Zhao, acknowledged “clear recovery trends” in China’s post-COVID-19 market but also admitted to “intensifying discounts and issuing additional coupons” during the Chinese New Year in response to a rebounding market and “stiff industry competition.”
Pinduoduo’s operating margin decreased by 450 basis points sequentially (although it more than doubled year over year) to 18.4% in the first quarter. This pressure is expected to continue throughout the year as the company escalates its promotions and broadens its platform with a new 10 billion yuan ($1.4 billion) “ecosystem initiative” that Zhao believes will “direct more resources toward high-quality sellers” and enhance its overall “service efficiency and quality.”
Pinduoduo also aims to gradually scale Temu, which VP of Finance Jun Liu characterized as being in an “early stage” of development and contributing only a “small” part of its revenue growth. This expansion could help diversify its business outside of China and allow it to compete head-on with AliExpress, Wish, and Amazon in the cross-border market.
While Pinduoduo has not given any full-year guidance, analysts predict its revenue will grow by 30%, its operating margin will slightly decrease, and its net income will rise by 6%. For comparison, analysts expect Alibaba and JD to see revenue growth of 9% and 5%, respectively, in their current fiscal years.
Is it a Good Time to Invest in Pinduoduo’s Stock?
Pinduoduo has forward earnings multiple of 19 times, while Alibaba and JD’s forward multiples are 13 and 15, respectively. Although Pinduoduo appears more expensive than its slower-growth competitors, it remains reasonably priced considering its near-term growth potential.
This relatively low price could be due to investor hesitation to invest in Chinese stocks amid ongoing delisting threats in the United States. The expansion of Temu overseas could also face potential hurdles such as cybersecurity investigations, direct bans (as just occurred in Montana), and other escalating tensions between the US and China.
However, if you anticipate these tensions subsiding, it could be an opportune time to invest in Pinduoduo, as it seems poised to continue leading the Chinese e-commerce sector in terms of growth for the foreseeable future. Its healthy margins, reasonable valuations, and significant domestic and international expansion potential suggest that the company is still an attractive investment.
Given its robust growth, healthy margins, and vast potential, Pinduoduo presents a compelling investment opportunity despite certain geopolitical uncertainties. As the fastest-growing player in the Chinese e-commerce market, it appears well-positioned to continue its upward trajectory and outperform its competitors. If you’re considering an investment in the e-commerce sector and believe in the potential for easing tensions between the US and China, Pinduoduo’s stock might be a worthwhile addition to your portfolio.
