Pinduoduo’s stock declined by 30% despite reporting solid growth.
It has been a turbulent week for Pinduoduo‘s (PDD 0.67%) investors. Despite reporting an 86% growth in its top line in the latest-quarter earnings, the leading e-commerce platform saw its stock plunge by more than 30%.
Investors were unimpressed by the strong numbers and instead focused on Pinduoduo’s warning of slower growth ahead. But is the situation that dire? Let’s explore this further.
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Pinduoduo has been executing at a world-class level
Pinduoduo has been one of the most remarkable success stories of the decade in the Chinese technology industry. Founded in 2015, it came from nowhere to become a giant to challenge the incumbents Alibaba and JD.com. In less than 10 years, the e-commerce company was making $34.9 billion in revenue and $8.5 billion in net profit by 2023.
But despite its massive scale, Pinduoduo continued to grow at a high double- to triple-digit rate in recent quarters. In the second quarter of 2024, revenue surged 86% to $13.4 billion, while net profit more than doubled to $4.4 billion. A steadily growing Chinese business and the recent expansion in cross-border e-commerce via Temu have driven growth.
In particular, Pinduoduo’s ongoing focus on the development of its ecosystem, better services, and providing value to customers has kept users coming back for more. The company also benefited from operating leverage since its fixed cost grows much slower than its top-line expansion.
It is also worth pointing out that Pinduoduo maintained a solid (and growing) cash hoard despite its neck-breaking growth rates. By the end of its 2024 second quarter, it had $39.2 billion in cash, cash equivalents, and short-term investments, with minimal debt.
In other words, Pinduoduo demonstrated a rare combination of growth, profitability, and a solid balance sheet.
However, management’s tone about prospects has been pessimistic
Most companies prefer highlighting their strengths and bright spots while avoiding or hiding their shortfalls. But that’s not the case with Pinduoduo. The tech giant has, on many occasions in the past, warned investors its quarterly profits would fluctuate and should not extrapolate its recent earnings into the future.
In the latest quarter, the company went even further in highlighting the risks that it could face in the future. Lei Chen, chairman and co-chief executive officer of Pinduoduo, focused almost exclusively on the challenges in the company’s latest earnings remark: “While encouraged by the solid progress we made in the past few quarters, we see many challenges ahead.” That’s his opening remarks in the earnings release, despite delivering a 144% growth in net profit.
In the earnings call, Chen discussed growing competition, planned massive investments to develop its ecosystem, and the inevitable decline in profitability in the future. In layperson’s terms, growth will be more difficult to achieve, and profitability will fall in the future for its business in China. Similarly, Chen said Temu faces an increasingly competitive environment and other non-commercial challenges, further dampening investors’ hope that Temu could help sustain Pinduoduo’s hypergrowth rates.
In addition, management outright rejected returning capital to investors in the form of dividends and share buybacks in the next few years. That was probably the straw that broke the camel’s back, prompting many investors to exit the stock.
What it means for investors
Pinduoduo’s remarkable growth over the years has made it a giant that rivals its largest peer, Alibaba. The downside is that size will naturally impede future growth. After all, no company can sustainably grow at 86% forever.
The silver lining is Pinduoduo recognized this and is doing what it can to keep its growth machine spinning. This includes investing in the development of its ecosystem, supporting quality merchants, and improving trust and safety.
These investments, while costly, will likely lead to a more sustainable development over the longer term.
Lawrence Nga has positions in Alibaba Group and PDD Holdings. The Motley Fool has positions in and recommends JD.com. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
