It has been challenging for investors in Chinese companies in the last two years. Leading names like Alibaba, Tencent, and others saw massive declines in their share prices.
Yet the up-and-coming e-commerce company Pinduoduo (NASDAQ: PDD) went against the crowd as its share price recently hit a two-year high. Let's delve into the factors that have fueled this outperformance.
Pinduoduo massively exceeded investors' expectations
The post-pandemic period has proven to be challenging for the e-commerce industry. As consumer spending habits shifted to categories like travel and dining, online sales growth slowed or even declined for many e-commerce companies. For example, Alibaba's revenue growth fell to just 2% in the fiscal year ended March 31, 2023. Similarly, Amazon reported an unimpressive 9% for 2022.
Yet Pinduoduo defied gravity by reporting solid and even accelerating growth over the same period. For instance, revenue grew 39% in 2022, while net profit more than quadrupled. And if that wasn't impressive enough, the young company smashed everyone's expectations this year, delivering accelerating growth rates of 58%, 66%, and 94% in the first three quarters of 2023. That's incredible, especially if we consider that Pinduoduo is already a massive company, generating 69 billion yuan ($9.4 billion) in revenue in the latest quarter.
This solid performance resulted from its focus on attracting users with low-priced products. And while a low-price strategy has always been Pinduoduo's hallmark value proposition, the e-commerce challenger has recently prioritized service improvements to satisfy its customers further. Product quality assurance, quick refunds, and fast delivery are examples of some benefits the company offers.
Pinduoduo could sustain its high growth rate for a while
Pinduoduo's rapid expansion over the last few years makes it one of the biggest companies in China. Still, there are good reasons to expect the company to keep growing despite its size.
Let's start with its home market in China. Pinduoduo expects its "high-quality development strategy" to win over suppliers, merchants, and consumers in the long run. On one hand, the tech company aims to strengthen the infrastructure and supply chain to help more farmers and manufacturers bring their products to the market. It also launched a 10 billion yuan support program to help merchants succeed on its platform. These efforts aim to bring people more high-quality products on Pinduoduo's platform.
Pinduoduo is also scaling up its overseas e-commerce business, Temu. While the company doesn't report the numbers of this segment separately, investors can get a feel for its success to date by focusing on some public information. For instance, Temu is already operating in 40 countries and has consistently occupied the top three positions of all app downloads in the Google Play Store and Apple App Store in most countries. It had already amassed over 100 million active users in the U.S. by May 2023.
It's still early days, but if Temu can continue to scale its business in the coming quarters, there's a good chance it could become Pinduoduo's next major growth avenue.
What does this mean for investors?
Pinduoduo has won over investors with its solid execution and growth, which explains the stock's year-to-date gain of nearly 80%.
While Pinduoduo may not sustain its recent quarterly revenue growth of 94%, it can continue to gain market share in China while supporting its early international expansion.
Growth-oriented investors should keep the stock on their radar.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lawrence Nga has positions in Alibaba Group and Pdd. The Motley Fool has positions in and recommends Amazon and Tencent. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.