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Pinduoduo said it is ready to sacrifice short-term profits and make long-term investments. The e-commerce market may usher in a more brutal battle. Who can make money from Pinduoduo next?

Author: Zhou Yiwei

Editor｜Anxin

The stock price plummeted by nearly 30%, and the market value increased by more than 50 billion US dollars in an instant. This is the bloody storm that Pinduoduo experienced in the US stock market last night.

The core reason for the sharp drop in Pinduoduo's stock price is that its revenue growth rate is lower than expected. In Q2 2024, Pinduoduo's revenue was 97.06 billion yuan (RMB), a year-on-year increase of 85.7%. However, according to market expectations, Pinduoduo's revenue in that quarter should reach 100 billion yuan, a year-on-year increase of 91%.

In fact, Pinduoduo's revenue growth rate of 85.7% is already far ahead of its domestic e-commerce peers. However, the management's statement further affected investor confidence.

In the conference call after the Q2 earnings report, Pinduoduo's management released several clear-cut opinions, including: the continued slowdown in future revenue growth is inevitable; the company will sacrifice short-term profits and make long-term investments to cope with increasingly fierce industry competition; the company will not repurchase or distribute dividends in the next few years.

In fact, Pinduoduo's management has clearly lowered market expectations more than once. For example, after the revenue and new users in Q3 2021 were both lower than expected, and the revenue and profit in Q1 2022 were both higher than expected, the then CEO Chen Lei clearly reminded in a conference call that with Pinduoduo's size, slowing growth is inevitable in the long run.

For a long time, Pinduoduo has been synonymous with "vigorous"; the capital market has become accustomed to allowing it to maintain high growth, although no one can achieve high growth forever.

However, the difference this time is that in the face of industry competition, Pinduoduo’s management has changed its past “Buddhist” attitude and clearly mentioned in the conference call that it is ready to sacrifice short-term profits and long-term investments in order to cope with the increasingly fierce industry competition.

Judging from the plans of Pinduoduo and other e-commerce platforms, the e-commerce market may usher in more brutal competition and there will be no end to the industry competition.

On August 26, Pinduoduo closed down 28.51% on the U.S. stock market, and its market value was roughly equivalent to that of NetEase.

In its latest report, Goldman Sachs believes that the earnings ratio of less than 10 times has reflected the concerns about intensified domestic competition and Temu's geopolitical situation. Goldman Sachs still gives Pinduoduo a buy rating with a 12-month target price of US$184.

However, the actual stock price drop has indeed made investors, especially those who have heavily invested in Pinduoduo, feel distressed.

Breaking down the Q2 financial report

The biggest complaint of the market about Pinduoduo's Q2 financial report is that the growth rate slowed down and was lower than expected. In the quarter, Pinduoduo achieved revenue of 97.06 billion yuan, a year-on-year increase of 85.7%, far exceeding the e-commerce market and its peers. However, compared with the growth rate in the past three quarters, it was slower and lower than market expectations.

Currently, Pinduoduo's revenue is mainly composed of online advertising and transaction income. The former mainly comes from its domestic e-commerce advertising, and the latter includes commission income from domestic e-commerce business and overseas Temu. Online advertising revenue in Q2 was 49.1 billion yuan, a year-on-year increase of 29%. Transaction revenue reached 47.9 billion yuan in Q2, a year-on-year increase of 234%.

The slowdown in Pinduoduo's online advertising and transaction revenue growth in Q2 is closely related to the domestic and foreign consumption environment.

According to the National Bureau of Statistics, from January to June, the total retail sales of consumer goods reached 23,596.9 billion yuan, a year-on-year increase of 3.7%. Among them, the year-on-year growth in June was only 2.0%.

During the same period, the national online retail sales reached 7099.1 billion yuan, a year-on-year increase of 9.8%. Among them, the online retail sales of physical goods reached 5959.6 billion yuan, an increase of 8.8%, accounting for 25.3% of the total retail sales of social consumer goods; among the online retail sales of physical goods, food, clothing, and daily necessities increased by 17.8%, 7.0%, and 7.8% respectively.

Looking around the world, sluggish consumption is a common situation. Temu has been the booster of Pinduoduo's rapid growth in the past few quarters, but in new markets outside the United States, especially in Southeast Asia, Temu has encountered more competitors. AliExpress, Lazada, Shopee, TikTok, Amazon and others have all joined in, hoping to gain a foothold in Southeast Asia.

In addition, cross-border e-commerce companies such as Temu are facing new challenges - the United States and the European Union may cancel the tax-free policy for cross-border small package direct mail.

In response, Temu launched a semi-custodial model to reduce fulfillment costs, respond to regulatory requirements, and strengthen compliance management. However, under the semi-custodial model, the proportion of revenue recognized by the platform in GMV is lower than that under the full-custodial model, which will affect Temu's growth rate to a certain extent.

However, Pinduoduo's profitability has further improved. In the second quarter, the company achieved an operating profit of 32.6 billion yuan, a year-on-year increase of 156%, 3.5 billion yuan higher than market expectations. The Q2 operating profit margin hit a new high of 33.6%, higher than 24.3% in the same period last year and 29.9% in the previous quarter.

It is worth mentioning that Pinduoduo's team efficiency is still strong. In the second quarter of this year, Pinduoduo's revenue was 97.06 billion yuan, an increase of 10.26 billion yuan from the previous quarter, but R&D expenses did not increase from the previous quarter, reaching 2.91 billion yuan; management expenses only increased by 20 million yuan from the previous quarter to 1.84 billion yuan.

Simply put, with the same amount of manpower input in a single quarter, we generated more than 10 billion in revenue.

E-commerce involution is far from over

No one is immune to the sluggish global consumption. Judging from the financial reports that have been released, e-commerce platforms have almost stopped growing, and the growth rate in Q2 has slowed down.

In the second quarter, the revenue of Taobao Group, the largest e-commerce platform in China, fell by 1% year-on-year, and the growth rate of Alibaba's international business also slowed down to 32%; JD Retail only increased by 1.5% year-on-year; Vipshop fell by 3.6% year-on-year; Kuaishou also slowed down, with revenue increasing by 11.6% year-on-year, a record low.

Over the past year, low prices have become the keyword for the crazy internal competition in the domestic e-commerce industry, and price wars have been raging. However, the price war seems to have shown signs of loosening recently.

According to LatePost, Douyin e-commerce has recently adjusted the priority of its business objectives, no longer putting "price power" first, but instead re-pursuing GMV growth. Alibaba's core management also recently emphasized "business awareness" at a meeting, rather than endlessly pursuing low prices.

The most important indicator for Taotian Group in 2024 is GMV (transaction volume), including the growth of Taotian's market share and the growth rate compared with competitors. In a recent earnings call, Wu Yongming, CEO of Alibaba Group and Chairman of Taotian Group, said that the priority of Taobao and Tmall is to improve the user's purchasing experience, thereby promoting the user's purchase frequency and driving the growth of GMV.

JD.com's management recently stated in a conference call that it will firmly promote the low-price strategy this year; it will continue to invest energy and resources to provide users with a better experience in products, prices, and services, drive continued growth in GMV, and expand market share.

In general, GMV growth and grabbing market share are the main goals of major e-commerce platforms at present. To this end, they will also increase their investment, including investment on the consumer and merchant sides.

Chen Lei, chairman and co-CEO of Pinduoduo Group, mentioned in a conference call that since the beginning of this year, competition in the e-commerce industry has become increasingly fierce. The company will invest tens of billions of resources to support new and high-quality merchants, and will reduce or exempt 10 billion yuan in handling fees for high-quality merchants in the coming year; continue to improve the quality and efficiency of the supply chain, and improve ecological governance to cope with the increasingly fierce industry competition.

Chen Lei said that Pinduoduo's management has reached a consensus and is ready to sacrifice short-term profits for long-term investment. For Pinduoduo, such a statement is not common.

It can be foreseen that the fierce competition in the e-commerce industry will continue, and no one can stay at the table easily.

Who is heavily invested in Pinduoduo?

Pinduoduo's stock price fell nearly 30% overnight, with the direct consequences being: Alibaba has expanded its market value advantage over Pinduoduo and is currently leading Pinduoduo by more than US$50 billion; the throne of China's richest man has changed hands again, with Nongfu Spring's Zhong Shanshan replacing Huang Zheng and becoming China's richest man again.

On August 9 this year, the Bloomberg Billionaires Index showed that Pinduoduo founder Huang Zheng replaced Nongfu Spring founder Zhong Shanshan, who had topped the list since April 2021, to become China's richest man with a net worth of US$48.6 billion.

Huang Zheng is a low-key person, so this is not news he would like to hear. Huang Zheng lost his title of the richest man due to the sharp drop in stock prices, and the most sad people are probably Pinduoduo's investors. Some people sold their shares and left, while those who did not leave saw their book assets shrink by nearly 30% overnight.

Among the investors holding shares in Pinduoduo, there are many well-known institutions.

The 13F documents submitted by investment institutions to the SEC disclosed by whalewisdom can be used as a reference. The reporting dates of these 13F documents are mostly in mid-August or even earlier. The report shows that as of June 30 this year, Pinduoduo is the largest holding stock of many well-known institutions such as IDG China, Capital Today, HSG Holding LTD (Sequoia China), Ivy Asset, Hillhouse, Gaoyi Asset, and Jinglin Asset.

The 13F filing shows that IDG China and Capital Today hold almost full positions in Pinduoduo; as of the end of Q2, they held 3,237,044 and 1,453,900 shares of Pinduoduo, respectively.

In the account of HSG Holding LTD, Pinduoduo accounts for 78.64%, but its shareholding is as high as 16,295,432 shares. Based on Pinduoduo's stock price in June, the market value of this part of the shareholding exceeds US$2.1 billion.

In addition, Ivy League, Hillhouse Capital, Gaoyi Capital, and Jinglin Asset Management's Pinduoduo positions also reached 47.88%, 29.16%, 27.64%, and 18.24%, respectively.

In the second quarter of this year, except for a few institutions such as IDG China and Hillhouse Capital that reduced their holdings in Pinduoduo, a large number of institutions increased their holdings in Pinduoduo. Among them, Jinglin Asset Management increased its holdings by 1,572,281 shares and Gaoyi increased its holdings by 447,154 shares.

As of the close of the U.S. stock market on August 26, Pinduoduo's share price closed at US$100, which is lower than the average holding price of institutions such as HSG Holding LTD and Gaoyi; approaching the average holding price of Ivy League, Hillhouse Capital, etc.; and still a little bit away from Jinglin Asset Management (average price of US$88.71) and Capital Today (average price of US$82.89).

However, for well-known institutions that have experienced many ups and downs, short-term fluctuations in stock prices are not enough to affect their judgment.

Only a few people can really make money in the secondary market. Today Capital, headed by Xu Xin, is one of the “few people” who made money from Pinduoduo.

According to public information, Capital Today established a position in Pinduoduo at a high level in Q3 2023 - purchasing 2,453,900 shares of Pinduoduo stock at an average price of US$82.89, involving an amount of more than US$200 million.

As of the end of December last year, just three months after establishing a position, Today Capital made a book profit of US$156 million, or approximately RMB 1.1 billion, on its investment in Pinduoduo.

From Q3 last year to the end of Q2 this year, Capital Today's holdings in Pinduoduo decreased by 1 million shares. This means that Capital Today has already cashed in on some of its shares. Although Pinduoduo's stock price fell by 30% overnight, Capital Today's remaining holdings still have a book profit of nearly 200 million yuan.

Pinduoduo's stock price is currently at its lowest point since November last year, with a market value of less than $140 billion corresponding to a price-to-earnings ratio of about 10. However, as management has pointed out, the uncertainty of Pinduoduo's future revenue and profit growth has increased.

Fortunes are sought in danger. Who will make money from Pinduoduo next?