The e-commerce industry is exploding in China right now.
Pinduoduo is a Chinese e-commerce business. The company’s latest quarterly earnings were quite impressive. Pinduoduo revenue is up nearly 700 percent for the year. The company’s gross merchandise volume across the past 12 months is up nearly 400 percent. Pinduoduo’s monthly active users have increased 226 percent on a yearly basis to nearly 232 million in the most recent financial quarter alone. The company went public this past summer at $19 per share. Pinduoduo is currently priced in the low $20s.
Pinduoduo is different from Alibaba and other top industry competitors in the Chinese market in that it does not offer brand name products. Rather, the company sells low-cost generic goods at considerable discounts primarily to those in the middle class and lower on the socioeconomic spectrum. Pinduoduo customers can group into shopping teams to share listings with social media links. The company’s monthly active users spiked nearly 500 percent across the year. In fact, Pinduoduo’s monthly active users increased nearly 200 million in the quarter alone.
Pinduoduo’s revenue primarily stems from web-based marketing services provided to merchants. The company is provided with a commission from purchases. Though it has only been six months since Pinduoduo’s online marketing services debuted, its online marketing revenues will likely continue to increase in the months to come. The company also provides products in bulk at considerable discounts. Customers are inclined to make purchases in tandem with others through the Pinduoduo’s social shopping experience. If social shopping on the web turns out to be a rising trend, Pinduoduo is perfectly positioned to capture the Chinese market and possibly beyond.
Pinduoduo bears are concerned with the company’s business model. The fact that President Trump is insistent on hiking the cost of Chinese imports is bad for Pinduoduo’s business. There has also been some talk of supposed counterfeit goods sold on Pinduoduo’s platform. The combination of increasing expenses along with regulatory issues makes the future a bit murky for Pinduoduo. The company’s operating expenses are up about 75 times across the most recent quarter.
Pinduoduo’s stock is currently priced at a whopping 15 times this year’s current sales. The stock is also priced at more than seven times next year’s anticipated sales. As a point of comparison, JD trades at a mere 0.4 times next year’s expected sales. Alibaba trades at about five times anticipated sales for the upcoming year. Pinduoduo’s current price level would not be so concerning if the company had a means of making a profit in the near future. One has to question whether the stock will remain anywhere near current levels as revenue inevitably cools and investors question whether Pinduoduo’s valuation is legitimate.
Pinduoduo shoppers typically engage in social shopping. This experience is characterized by shoppers sharing product links through social media platforms. The model is proving quite popular, especially amongst younger shoppers. The most glaring flaw with social shopping is the average order size is comparably small. At the moment, Pinduoduo is selling its inventory at minuscule margins. However, margins have the potential to change. Amazon was in the red for years before finally turning a profit and experiencing meteoric growth thereafter.
For investors who already own this stock, it’s best to hold for the moment and watch this stock in the months ahead. Monitor the news concerning allegations of counterfeit goods making the rounds on the Pinduoduo platform. If the company can get past this public relations crisis and expand its margins, it can eat into the profits of Alibaba and the other top industry players in the Chinese market.
If allegations that Pinduoduo hiked its financials prove true and revenue growth is stemming from phony bulk purchases, it makes sense to sell Pinduoduo or even short the company. However, none of the allegations noted above have any substance. If Pinduoduo steers clear of these roadblocks, there is a good chance the company will gradually win that much more of China’s coveted e-commerce market. Hold tight, wait to see if Pinduoduo cools off from its current valuation at 15 times current sales and give company executives a chance to get the business in the black.