EqualOcean on Pinduoduo 3Q 2019, Part 1/3: An Eventful Fall

Author: Shuhong Chenli, Ivan Platonov Editor: Luke Sheehan Nov 29, 2019 07:28 PM (GMT+8)

In this series of articles, we walk through the key aspects of its fresh financial report, elaborate on the main reasons for the recent fall in stock price and discuss its future potential and challenges.

Pinduoduo is suffering an USD 11 billion slump in market cap after its earnings missed estimates. Image credit: Mark Finn/Unsplash

Shares of Pinduoduo (PDD:Nasdaq) plummeted 22.89% on November 21 after the company released its financial results for the third quarter ending September 30, 2019. This was the largest single-day drop since its IPO; the market value of the company has now shrunk to USD 36.5 billion.

With USD 10.8 billion of market capitalization burned overnight, the company was surpassed by JD.com (JD: Nasdaq), Baidu (BIDU:Nasdaq) and NetEase (NTES:Nasdaq), and ranked as the seventh-largest Internet firm in China.

The boom-and-bust pattern of the stock price of Pinduoduo, triggered by the release of its financial results, has happened for the firm once again.

Total revenues in the third quarter of 2019 were RMB 7.5 billion (USD 1.1 billion), representing a 123% year-on-year increase, and a rise of 3% from the last quarter of 2019. The number was slightly lower than the USD 7.6 billion average of analysts’ estimates on Bloomberg. 

Net losses attributable to ordinary shareholders was RMB 2.3 billion (USD 326.7 million), which was a  considerable increase compared with the net loss of RMB 1.1 billion in the same quarter of 2018. The figure almost doubled that of the average analyst projection of RMB 1.2 billion – this is considered to be the primary cause that triggered the tremendous drop in Pinduoduo’s stock.

On the other hand, it is worth mentioning that there was also positive news carried by its 3Q 2019 financial report. The number of active users – one of the central metrics for every Internet company, and E-commerce platforms in particular – was the aspect wherein Pinduoduo performed especially well during the third quarter of 2019.

During this three-month period, active buyers on its platform hit the 500 million milestone to reach 536.3 million for the twelve-month period ending September 30, 2019. This represents an increase of 39% from 385.5 million last year. Besides, average monthly active users (MAUs) on its app also boosted remarkably in the quarter, recorded at 429.6 million, representing an increase of 53.1 million from the second quarter of 2019 – marking the largest increase in a single quarter since its listing.

Pinduoduo – the young challenger to China’s e-commerce dominators Alibaba and JD – has always been surrounded by controversies, even starting from its pre-listing period. People continuously pass different judgments regarding its ‘team purchase’ program, the idea of integrating the ‘Costco model and Disneyland model,’ the ‘CNY 10 billion subsidy’ campaign (百亿补贴计划), the ability to build up a decent reputation, etc. – some of these criticisms are justified, and some verge on the ridiculous.

In the four years since its founding in 2015, the rising e-commerce giant has always been in the midst of a storm, facing confrontations as it explores and strives to grow.

In short, the fall in the share price of Pinduoduo after its third-quarter release could be possibly attributed to internal and external reasons.

On the one hand, considering the fact that Pinduoduo's net loss far exceeded expectations, while the revenue growth rate slowed down, some investors – especially the short-term ones – would not go deep into the company’s performance on other core metrics in making their judgements, which then shook investors' general confidence of the company.

Meanwhile, its huge increase in sales and marketing expenses did not trigger a corresponding soar in revenue, which made some typical secondary-market investors doubt the effectiveness of its ‘CNY 10 billion subsidy’ program.

On the other hand, Pinduoduo was facing increasingly severe pressure from its counterparts, especially after it's market capitalization surpassed JD.com in late October. Besides, the two Chinese e-commerce juggernauts – Alibaba and JD.com – both aimed at the lower-tier cities market in the third quarter of 2019.

Meanwhile, TMall launched its ‘Double Nine Huasuan Festival’ (天猫九九划算节) – employing a similar CNY 10 billion strategy in targeting value-for-money – and JD.com officially launched its online group-buying platform ‘Jingxi’ (京喜) in September. Whether these will constitute lethal countermeasures or not, such market shifts undoubtedly leave a question mark on Pinduoduo’s ability to sustain its sharp growth in the future.

Here’s the second part of the series on Pinduoduo’s quarterly financial report, where we dissect the story behind the company’s latest performance.

In the last part – ‘An Optimistic Outlook’ – we talk about the company’s possible strategic moves and future prospects.