Deciphering Earnings of Big Names
[3.2024] Decoding Pinduoduo's earnings: can the company sustain its stellar performance?
In the last two years, Pinduoduo has surged an impressive 151%, with its share price once recovering to almost two-thirds of its peak. This rally shines in contrast to the wider slump in Chinese tech stocks, with giants like Alibaba and JD falling to just a quarter of their historic highs, dropping 34% and 57%, respectively.
Amid a stark contrast where Pinduoduo's stock soared, Alibaba shares plummeted. By November 2023, Pinduoduo eclipsed Alibaba as the most valuable e-commerce platform in China.
Even with consumer confidence shaken and e-commerce fiercely competitive, Pinduoduo has swiftly outmaneuvered its competition. Whether it can keep this edge is the question. To evaluate its prospects, we may scrutinize its finances, focusing on growth rate trends, margins, and performance against forecasts.
1. Growth rate
To evaluate Pinduoduo's performance, we should consider two aspects of its growth rate: the company's own trends and a comparison with its e-commerce peers.
Pinduoduo's countercurrent rise is most evident in its rapid revenue growth. From Q1 2022 to Q3 2023, Pinduoduo's revenue growth accelerated, with the latest quarter showing an almost double year-over-year(YoY) increase. This swift growth may have been a key driver behind the significant rise in its stock price.
Two main factors fueled Pinduoduo's revenue engine. Initially, Pinduoduo became a major beneficiary amid economic uncertainty as its low-price strategy resonated with consumer demand of cuting back on costs. Later, the explosive international expansion through Temu propelled another crucial surge in revenue.
How does Pinduoduo stack up against its e-commerce competitors, primarily Alibaba and JD.com? Let’s compare the revenue growth rates and the proportion of sales expenses to revenue among these three giants.
Starting with revenue growth, a faster rate may suggest a more competitive edge. JD.com’s revenue is largely tied to e-commerce, while Alibaba has a more diversified portfolio, so we’ll focus on its core e-commerce revenue for this comparison.
Since Q2 2022, Pinduoduo's revenue growth has consistently outshone Alibaba and JD.com, which showed single-digit growth and declines, respectively. Pinduoduo has not only maintained but accelerated its growth each quarter, grabbing a larger slice of the market in the process.
The sales expense ratio may be a key indicator of competitiveness. An increasing trend can indicate a disadvantage.
For Pinduoduo, this figure has been improving. Despite the expected ups and downs from big sale events like 618 and Double 11, Pinduoduo's sales expenses as a share of its revenue have been trending down, from 47.2% in the first quarter of 2022 to 31.6% by the third quarter of 2023. On the other hand, Alibaba has seen a slight uptick in its sales expense ratio, going from 16.5% to 18.5%, while JD.com's has stayed more or less even with a small dip.
Looking ahead, it might be overly optimistic to expect Pinduoduo to keep doubling its growth rate. Even maintaining a 30% growth rate could prove difficult. The remarkable growth of Pinduoduo's international business, particularly with Temu, is something we should continue to watch.
The critical questions are: Can Pinduoduo keep outpacing its rivals in revenue growth, and can it sustain or further improve its sales expense ratio? The answers to these questions will tell us a lot about the company's ability to keep its lead in the competitive e-commerce space.
2. The change in profitability
The second important point to note from Pinduoduo's financial report may be the change in profitability, specifically the gross margin and net margin.
Pinduoduo's gross margin initially rose and then fell from the first quarter of 2022, peaking mainly due to the scale effect of rapid revenue growth. However, since the third quarter of 2022, the gross margin has been declining each quarter, dropping a total of 18 percentage points from 79.1% to 61%.
This decrease isn't due to diminishing profitability in domestic operations but largely because of significant investments and user subsidies in the newly promoted Temu international business and the recent Pinduoduo Grocery venture during their rapid expansion phases.
While Pinduoduo hasn't disclosed revenue and profit performance by individual business segments, it's likely that the gross margin for these new ventures is negative in the early stages, contributing to the overall decline in gross margin.
Despite this, there are two noteworthy aspects of Pinduoduo's gross profit. First, the overall gross profit has continued to grow, with Q3 2023 gross profit reaching 42 billion yuan, a 42% increase year-over-year.
Additionally, the rate of decline in gross margin has been decelerating. In the first three quarters of 2023, Pinduoduo's gross margin decline has been tapering off, with reductions of 7.1, 6.2, and 3.2 percentage points, respectively. If this narrowing trend continues, it may indicate that the potential losses from Pinduoduo's Temu and grocery ventures are diminishing, potentially leading to a turnaround toward profitability.
In terms of net margin, while Pinduoduo has seen an increase in absolute net income levels, the margin has decreased overall, mainly due to the significant drop in gross margin. However, the decrease in net margin is much less than that in gross margin, thanks to effective cost control in operating expenses.
Pinduoduo has reduced its sales expense ratio from 39.6% in Q3 2022 to 31.6% in Q3 2023, R&D expenses from 7.6% to 4.1%, and SG&A expenses from 2.6% to 1.1%. The overall operating expense ratio decreased from 49.7% to 36.8%, mitigating the impact of the gross margin decline on net margin.
This improved operational efficiency is a key competitive advantage in the cutthroat e-commerce industry. Moving forward, monitoring Pinduoduo's operating expense ratio and its subsequent effect on net margin will be crucial to gauge the company's sustained competitive advantage.
3. Actual Performance vs. Performance Expectations
Pinduoduo discloses its revenue in a consolidated manner without breaking it down by business segment. Additionally, the company's management rarely shares operational data with the public ahead of financial reports. Thus, Pinduoduo's earnings can be quite unpredictable, and actual performance may significantly differ from Wall Street analysts' expectations, leading to substantial stock price volatility post-earnings release.
On moomoo, we can see a comparison of Pinduoduo's forecasted and actual performance. For example, in the past three quarters, Pinduoduo has consistently exceeded expectations, resulting in significant post-earnings stock price surges. Given this track record, the market may have high expectations for Pinduoduo's upcoming financial reports.
For instance, analysts currently project Pinduoduo's Q4 2023 revenue to be $75.9 billion, as shown on moomoo. If the actual results significantly beat this forecast, it could positively impact the short-term stock price. Conversely, if the performance falls short, it could create short-term negative sentiment.
What if Pinduoduo's earnings meet expectations? It might still be seen as a negative, given the company has exceeded expectations three times in a row. To further boost the share price, merely meeting the mark may not suffice; outstanding performance may be needed.
In summary:
In terms of growth, Pinduoduo's revenue has significantly outpaced its peers, and its sales expense ratio is declining, indicating strengthening competitiveness. We should observe whether the company can continue this trend.
Regarding profitability, Pinduoduo's gross margin has dropped sharply due to cash-intensive ventures like Temu, while there has been considerable improvement in the operating expense ratio, leading to a slight decline in net margin. Moving forward, we can watch for marginal improvements in the gross margin and whether the company can maintain high operational efficiency, potentially improving the net margin.
With respect to performance projections, since Pinduoduo tends to have a high degree of earnings variability, it's important to compare actual financial performance with the expected benchmarks. A significant outperformance of the projections could provide a boost to the stock price.
