Consumer Staples Author: Contributor, Damien Robbins Mar 22, 2021 06:14 PM (GMT+8)

Pinduoduo has grown into one of the largest e-commerce players in a short amount of time, rising past Alibaba in terms of annual active buyers while seeing revenues nearly double this year. Positioning within an agriculture niche provides a moat against competitive threats from other leading e-commerce marketplaces, while still paving the way for strong revenue growth in the upcoming years.

Contributor - PDD

Pinduoduo (PDD:NASDAQ) has established itself as one of the largest e-commerce players in just 5 years' time, taking a traditional marketplace with offerings across nearly all categories, and reenvisioning it with a social, team-buying model. The UI provides an individually catered, 'virtual bazaar' feed, under a 'you don't know what you want but happy to discover' style. While focused on an agricultural niche, Pinduoduo manages to generate about 4% of global GMV across all categories, making it the fifth-largest marketplace, behind Alibaba's Taobao and Tmall.com, Amazon, and JD.com. Pinduoduo also has an immensely large user base, topping Alibaba to reach 788.4 million annual active buyers (+35% YoY), with 719.9 million monthly active users (+50% YoY). Status as the largest agriculture platform, combined with strong future growth potential makes an interesting buy point for Pinduoduo as shares still remain impacted from the tech-heavy selloff.

Pinduoduo's agriculture niche has aided its rapid growth in users, GMV and revenues, as it offers fresh produce and groceries, which isn't a prime feature of other leading marketplaces. Annual GMV rose 66% to CNY 1.67 trillion, pushing revenues 97% higher to CNY 59.5 billion, more than tripling in just two years.

Leveraging connections with local farmers and grocers can prove difficult to replicate at scale and cost by JD.com, Alibaba, and Meituan, leaving this agri-commerce niche to Pinduoduo. Expanding presence in building connections in the grocery space saw Pinduoduo launch Duo Duo Maicai, providing next-day grocery delivery and fresh produce, thus putting it against Meituan in that space. A recent shift away from traditional wet markets, in part stirred by the pandemic, has allowed grocery services like Maicai to grow, since customers can buy goods as late as 11 PM and get their orders by 4 PM the next day. Customers have a wide-ranging selection of fresh, local produce through the app, taking advantage of the low-cost buying model.

High engagement within its user community is a huge positive, with average annual spend per active buyer prior to 4Q up 27% to almost CNY 2,000 (USD 294); 4Q's results noted that annual spend rose even higher to CNY 2,115 (USD 324). Agricultural GMV doubled for the year to over CNY 270 billion (USD 42 billion), ahead of an original CNY 250 billion forecast from management. Translating growth in GMV to revenues and earnings has huge potential for Pinduoduo.

Looking forward, Pinduoduo's securing of the agri-commerce niche while offering a traditional marketplace should allow revenues to grow at a ~40% CAGR through FY23 to CNY 157.5 billion (USD 24 billion) – a very impressive growth runway. By FY24, Pinduoduo might be able to generate EPS of USD 2.50, giving it a forward PE of ~58x - while this is high, keep in mind that Pinduoduo hasn't fully reached profitability, losing CNY 184.5 million on the quarter and nearly CNY 3 billion on the year. With rapid revenue growth, however, Pinduoduo could shift to ~USD 0.30 in EPS for FY21, which would give EPS triple-digit growth rates each year through FY23.

Costs are probably the most important figure to watch, as Pinduoduo looks to grow at scale while maintaining high customer engagement. This will continue to push advertising, market, and promotion expenses higher, impacting the profitability picture. Sales and marketing expenses rose 52% YoY to CNY 41.2 billion (69% of revenue, down from 90% in FY19) – while sales and marketing expenses as a percentage of revenue is falling, it likely needs to fall below 55% to pave the way for profitability.

Even with an immense cost picture impacting profitability, Pinduoduo further separates itself from Alibaba and JD.com through its margin profile, although it could see some impacts moving forward. Pinduoduo has a strong gross margin profile, fluctuating between 72% (1Q 2020, from pandemic impacts) and 85.7% (2Q 2018); 4Q's margin hovered at 81.1%, pushing FY20 gross margin to 79.8%. For comparison, Alibaba's gross margin sits at ~44%, while JD's is ~8.7%. With a gross margin above 77%, Pinduoduo could post gross profit higher than operating expenses as early as 2Q, but more likely in 3Q, leading to the profitability inflection. However, profitability and margins could face pressure from an initiative to build out its logistics infrastructure for handling perishables, and increased expenditures in marketing/advertising and R&D in regards to AI-driven crop productivity research.

Even with the current selloff, some risks do exist in regards to valuation, as Pinduoduo still trades at a premium multiple to both Alibaba and JD.com: ~8.2x FY23 sales, compared to 3.6x and 0.7x respectively, while still remaining unprofitable. However, rapid revenue growth driving positive earnings leverage combined with the agri-commerce moat do serve as a safety net to this valuation. Pinduoduo remains on its strong upward trajectory and could have a lot in store in the upcoming years in grocery services and in AI/machine-learning agricultural innovation.

Another risk is that Pinduoduo's agri-commerce focus does not offer seamless transitions to cross-border transactions, and could serve as a barrier to international expansion, keeping Pinduoduo confined to China. This could ultimately cap outright user growth, leaving Pinduoduo reliant on more transactions or more spend per buyer in a long-term forecast (>5 years). Additionally, Pinduoduo could be safe from potential antitrust proceedings and government oversight facing big tech like Alibaba, Tencent, Baidu, and a handful of others, since it doesn't have fintech or sway on media; however, user numbers exceeding Alibaba's could be a cause for some extra watching from the government.

The margin profile also creates a risk to Pinduoduo's profitability picture, as a dedication to spend more and more on marketing/advertising and promotions/discounts all can cut into a translation of top-line growth into bottom-line growth. If expenses grow more than 15% each quarter, Pinduoduo's profitability picture could be cut nearly 30% lower to USD 1.80 by FY23, which could have a large impact on valuation with a lower multiple.

Overall, Pinduoduo looks to have an impressive runway ahead for revenues and GMV as it now has risen to the largest e-commerce platform on an annual active buyer basis. Revenues could be set to grow by ~40% annually to CNY 157.5 billion, with profitability likely later this year as revenue growth offset expenditure growth. While Pinduoduo still trades at a premium to Alibaba and JD.com, it has a superior margin profile and the agriculture niche should serve as a moat and barrier to entry for the near-term. Some risks within the margin profile, profitability, and government oversight do exist, but the long-term potential remains positive.


This article was contributed exclusively by Damien Robbins. Follow Damien on Seeking Alpha or LinkedIn.

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