I remain bullish on Chinese e-commerce company Pinduoduo (PDD) despite posting mixed earnings. When China’s growth slows down and geopolitical tensions rife worldwide, investors do not need more reasons to exit their position in an unprofitable company.
However, if you are also looking to jump ship, it may not be the best time. Pinduoduo is a deeply discounted e-commerce play with an aggressive growth strategy. Interestingly, considering the positive price momentum post the report, the markets seem to be thinking the same.
I believe the company is worth investing in and has shown a lot of potential in the recent past. Many people in China have thought that Pinduoduo is only for Chinese citizens who live in less-developed areas. However, due to the company’s efforts, it has diversified into other offerings, putting into direct competition with Alibaba (BABA).
However, the latest earnings are definitely a dampener on investor sentiment. Pinduoduo announced revenue that missed analysts’ estimates due to the economic slowdown in China. It’s the third straight quarter that it disappointed investors.
However, the company offers a compelling long-term growth story. Pinduoduo made its name by selling good quality goods for low prices to their customers. It is an underserved niche that will continue to deliver strong tailwinds for this one. Therefore, if you are risk-tolerant, PDD may be a great addition to your portfolio.
Earnings Miss the Mark, but There Are Silver Linings
Pinduoduo has released its revenues for the December quarter. Total revenue was RMB27.2 billion, just 3% higher and lower than the RMB29.8 billion forecasted. This was also the company’s slowest growth since going public.
However, the company did net RMB6.6 billion from a previous loss thanks to lower costs and a one-time rebate from a service provider. In addition, Pinduoduo’s GMV finished at more than RMB2,441 billion last year and surged 46% compared with 2020.
Management deserves a lot of credit for trimming costs in the current environment. Due to the pandemic, infrastructure and logistics are becoming major issues for e-commerce companies. Somehow, Pinduoduo managed to eke out a profit.
Plus, the company is now moving into other areas that could prove even more profitable for the enterprise.
“In 2021, we made the strategic shift from sales and marketing toward research and development,” Chairman and CEO Chen Lei said. “We see ourselves making more long-term investment, especially in agriculture and R&D.”
Overall, the earnings did not do the stock any favors. In fact, it came at a very inopportune time. Chinese authorities recently announced they were thinking of relaxing regulatory pressures and supporting local companies. It came as a welcome development for a market that has been battered by regulation over the past couple of years.
A bit of background is necessary for the unfamiliar. The Chinese government is looking to reign in its tech sector. It is enacting several pieces of legislation that are weighing down stocks in the industry. It is one of the major reasons investors remain on the sidelines and don’t want to invest in Chinese stocks unless there is clarity.
What Are the Risks Pinduoduo Is Facing?
There are many things to like about Pinduoduo. However, there are certain risks that you should keep in mind when allocating capital to this security.
First, the company’s use of subsidies is controversial. Regulators can think of these subsidies as price cutting and manipulation of the market. It also weighs down the margins of the company. The company’s argument is that it is looking to create a large user base in rural areas and create a dominant position against Alibaba.
Second, there is still uncertainty regarding the Chinese markets when it comes to regulatory activity.
The Chinese economy is highly regulated, with the government making decisions on trade and China’s foreign investment. The government tightly controls industries and markets in China, with these policies contributing to a challenging business environment for Western companies doing business in China. The recent announcement helped shares perk up. Nonetheless, we do not know for sure if this is a secular change.
Finally, investors might want information from the company regarding a secondary listing on the Hong Kong Stock Exchange. Tension has been rife between the U.S. and Chinese securities regulators for quite some time regarding accounting regulations.
If the Chinese companies are forced to delist in a worst-case scenario, then having a secondary listing is like an ace in the hole. Since there is no clarity on the subject, that might become an additional issue for the company.
Wall Street’s Take
Due to the steep tech selloff, regulatory headwinds, and lukewarm earnings, Pinduoduo has been trading at a discount. The e-commerce company sports a Moderate Buy consensus rating, based on six Buys, three Holds, and one Sell rating assigned in the past three months.
The average Pinduoduo price target is $64, implying an upside potential of 26.9%.
The Bottom Line on Pinduoduo
If you invest in the Chinese stock market, then volatility is one of the risks you should be aware of. Pinduoduo has seen its stock fluctuate with the release of mixed earnings reports.
However, the company deserves credit for controlling costs and trying to chart a new path. It is also serving an underserved niche. Therefore, if you are risk-tolerant, now may be a good time to consider buying.
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