2023 was a disappointing year for Chinese companies with a few exceptions like PDD Holdings (NASDAQ: PDD), also known as Pinduoduo. The up-and-coming e-commerce stock delivered an impressive 79% return to investors last year as its revenue climbed 75% year over year in the first nine months of 2023.
And there are good reasons to expect Pinduoduo's strong momentum to continue in 2024 as the company executes its growth strategy.
Shifting to a sustainable growth strategy in China
Pinduoduo has been one of China's best success stories in recent years. Founded in 2015, when China already had two hugely successful e-commerce companies (Alibaba and JD.com), the newcomer rose at breathtaking speed to become a multibillion-dollar revenue enterprise.
To put it into perspective, Pinduoduo generated 68.8 billion yuan ($9.4 billion) in revenue and 16.7 billion ($2.3 billion) in operating profit in the third quarter of 2023. It also served 882 million buyers in the 12-month period that ended March 31, 2021 -- the last time it reported this metric. Those are remarkable feats for a company that's not even a decade old.
Its rapid rise resulted from its growth-at-all-costs strategy of investing heavily (and incurring losses) to expand its user base and gross merchandise value. And judging from its latest financials, the e-commerce company has successfully executed its strategy. The only drawback is that it has probably reached the ceiling on user growth in China.
As a result, Pinduoduo shifted its focus in 2023 to high-quality growth, centered mainly around customer satisfaction and healthy ecosystem development. For example, the e-commerce company has been working on customer service on top of its usual focus on low prices and growing product selections. It has also leveraged artificial intelligence (AI) to improve the customer experience, such as automatically issuing refunds on unsatisfactory purchases. It will likely maintain that high-quality-focused growth strategy in 2024.
Besides, Pinduoduo will continue to invest in its e-commerce ecosystem so that all stakeholders can thrive over the long run. For example, it has been investing in the infrastructure needed to help farmers and manufacturers bring their products to consumers. It also launched a massive 10 billion yuan ($1.4 billion) subsidy scheme to help merchants succeed on its platform.
In short, Pinduoduo will build on its prior momentum, aiming to improve customer mindshare and, hopefully, wallet share.
Scaling up its overseas business
With its Chinese business beginning to mature, Pinduoduo has turned more attention to its cross-border e-commerce business, Temu, to sustain its rapid growth.
Launched in the United States in Sept. 2022, Temu rapidly expanded into dozens of countries. By Nov. 2023, it had clocked 250 million downloads globally and surpassed 100 million active users in the United States. And in June 2023, its monthly gross merchandise value exceeded $1 billion.
2024 will be the year Temu steps on the accelerator to scale up its business in existing markets and enter more countries. In particular, Temu will likely focus on growing its user spending in key markets like the U.S., U.K., Australia, and a few other developed nations.
Thus, it won't be surprising if the e-commerce company sustains its huge capital layout in advertising -- it just bought half a dozen pricey Super Bowl ads. Besides, consumers will likely see sustained low prices -- via shipping subsidies and discount vouchers – as Temu works to build mindshare and market share.
Beyond that, the company also wants to improve its business's qualitative aspects, including product categories, shipping time, product quality control, and counterfeit prevention. These are critical focus areas as Temu tries to steal customers away from incumbents like Amazon and Walmart in the U.S.
What it means for investors
Pinduoduo's mind-blowing expansion in China is unlikely to continue, given the company's size. However, the overall business can still grow at a reasonably high rate thanks to Temu's international reach.
Still, investors should be prepared to endure short-term pain, including declining margins and profits, as Pinduoduo ramps up spending to execute on these global ambitions.
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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.
