Pinduoduo (拼多多), the third largest and still fast-growing e-commerce in China just published its Q4 financial results earlier.

This article will highlight key figures and provide analysis of why its share price drops after the publish of Pinduoduo's Q4 earnings.

Highlights

Pinduoduo highlights the following five aspects:

- GMV: Ending December 31, 2018, GMV was CNY 471.6 billion (USD 268.6 billion), an increase of 234% from CNY 141.2 billion in the twelve-month period ended December 31, 2017

- Total revenues: In the quarter, revenues were CNY 5,653.9 million (USD 822.3 million), an increase of 379% from CNY1,179.4 million in the same quarter of 2017.

- Research and development expenses: In the quarter, MAU were 272.6 million, an increase of 93% from 141.0 million in the same quarter of 2017.

- Active buyers: In the twelve-month period ended December 31, 2018, the number of active users was 418.5 million, an increase of 71% from 244.8 million in the twelve-month period ended December 31, 2017.

- Annual spending per active buyer:  In the twelve-month period ended December 31, 2018, the average spending per buy was CNY 1,126.9(USD 163.9), an increase of 95% from CNY 576.9 in the twelve-month period ended December 31, 2017.

Note: it is the unaudited financial results 

Soon after the results have been released, the share price of Pinduoduo has dropped by 17.45% (USD 5.9 billion in absolute amount).

Possible reasons for the price drop:

1. Dramatically increasing expenses

As can be seen from the table below that expenses increase at a much faster speed (1200%) than revenue or COGS. 

Note: in million, the currency used is CNY.

Pinduoduo's expenses include sales and marketing expense (S&M), general and administrative expenses (G&A), and Research and development expenses(R&D).

- S&M expenses: due to increased spendings on both online and offline advertising campaigns to cultivate greater user recognition. More advertising might be because of the increasing difficulty in acquiring customers.

The number of new users increased in Q4 is 33 million, compared to 42 million in the third quarter. Moreover, the average user acquisition costs per customers increase to CNY 185.4 (USD 27.6) with an increase of 140% from Q3.

- G&A expenses: due to an increase in headcount and share-based compensation expenses as Pinduoduo expanded its operations. 

​​​​​​- R&D expenses: due to an increase in headcount to built technical capabilities. Expenses are primarily used in recruiting more experienced R&D personnel as well as in R&D related cloud services expenses.

Adding to that, LU Qi, the former senior executive at Baidu, will also join as the head of Pinduoduo' s technology consulting council.

The R&D expenses reach CNY 525.2 million increasing by 901%.

2. GMV is too high to believe

It seems that Pinduoduo more often mentions its GMV figures rather than revenue or profit figures. Is that because revenues and profits are recognized in a more strict manner?

Dividing the number of revenue by GMV, it gets only 0.12%. This means the great majority of it GMV does not positively contribute to revenues and that's why the phenomenon of greater GMV, greater losses occurred.

Albeit Pinduoduo did not give the exact way that how its GMV is calculated but by recalling the general formula of GMV, it includes all the transactions including unpaid ones not excluding returns and exchanges sales. 

According to Blue Orca Capital, a short seller, one cause for the overwhelmingly large GMV might to one specific function of Pinduoduo that there is no shopping cart setting. This means once customers added something, it will automatically be added in an order which contributes to the GMV.

Thus, Blue Orca Capital believes the GMV of Pinduoduo has been inflated and therefore cannot reflect the true and fair view.

The valuation that Blue Orca capital has given to Pinduouo was USD 7.1 per share, only about one-third of its per share price.