Pinduoduo: Finally Profitable, Growing At 40%+ CAGR, And Absurdly Cheap

  • Pinduoduo is a mobile-first agriculture tech platform that’s growing at an amazing rate.
  • Having turned profitable for the first time, its operating profit margins were impressive.
  • Priced at 5x its 2022 revenues, this is the only Chinese stock I buy.

Investment Thesis

Pinduoduo (PDD) has been incredibly rocky with its share price dramatically selling off in 2021. However, when all was said and done, not only is the company growing at a very fast pace, but perhaps more importantly right now, it finally gave investors a look into its profitability profile.

While keeping in mind that this stock is very volatile and not for the faint-hearted, paying 5x its 2022 revenues is really too cheap to be ignored.

PDD Stock – The Big Slide in 2021

Data by YCharts

 

As you can see, Pinduoduo’s share price performance in 2021 has been very challenging. As investors flee from ”China-risk”, the lesser-known Pinduoduo was primed to sell-off in this environment and performed meaningfully worse than its peer, Alibaba (BABA).

That said, I contend that when the tide turns, the same will also happen on the other side and that Pinduoduo will be a very strong performer from these levels.

What’s more, during this quarter, its underlying performance has actually been impressively strong. But before that, let’s talk about Pinduoduo.

What’s Pinduoduo? And Why Should I Care?

Pinduoduo is a mobile-first e-commerce platform where consumers can get bargains from shopping together.

For Westerns, this is quite strange. But amongst Chinese consumers, social media and e-commerce together are gaining momentum.

As you can see below, Pinduoduo’s MAUs are higher than 738 million as of Q2 2021. This puts practically any social media platform into perspective, with Western platforms struggling to grow meaningfully above 200 million MAUs.

For context, Alibaba’s platform is valued approximately 4x higher, while its MAUs reached 939 million during its recently reported fiscal Q1 2022 results.

Pinduoduo’s Revenue Growth Rates Are Impressively Strong

As a reminder, merchandise sales are 1st party trials that Pinduoduo temporarily fills with missing products that its consumers need, while Pinduoduo looks for merchants who can offer these products on its marketplace. There’s no plan to grow this side of the business.

We should instead focus on the core business, which in Q2 2021 was up 73% y/y to $3.3 billion. Even if Pinduoduo’s revenue growth rates are now at sub 80% y/y, investors have plenty to be excited about here, because Pinduoduo has now turned profitable.

Pinduoduo Turns Profitable For the First Time

Anyone that’s followed Pinduoduo for a while has become all too accustomed to the narrative that the only reason why Pinduoduo is growing at such a fast rate had been through its reliance on heavily subsidizing its consumers through promotions and coupons.

However, as it turns out, despite growing its top-line by 73% y/y, its sales and marketing expenses have actually continued to decrease as a percentage of total revenue.

Indeed, as you can see above, SG&A as a percentage of total revenue is down for the third consecutive quarter, at 47% of total revenue. In the graph above I’ve excluded merchandise sales, which Pinduoduo notes has no plan to grow those revenues, they are just a temporary business unit to fill temporary products that are missing on its platform.

Moving on, this is exactly the dynamic that you’d want to see from a healthy business, as its top-line grows, its ability to overcome its fixed costs and as the business reaches a large scale, Pinduoduo’s size works towards sustainable profits.

Consequently, as we move lower down its income statement we can see this precise operating leverage taking place.

Not only can we see that Pinduoduo just reported its first profitable quarter, but that its operating profit margin was 14%, which is an impressive turnaround from its performance in Q1 2021.

What’s more, given the large insider ownership in this stock, you can be assured that Pinduoduo’s main shareholders are very highly motivated to see its share price going higher.

Pinduoduo’s biggest shareholder being its young founder Zheng Huang, with Sequoia China also along for the ride and holding 6.4% of the stock.

PDD Stock Valuation – Cheap, But Not for the Faint-Hearted

As touched on several times, Pinduoduo’s share price has been incredibly volatile and is likely to continue to be so, at least until investors’ appetite for Chinese stocks returns.

Here are some back-of-the-envelope calculations. So far, for H1 2021, Pinduoduo has grown its top line to RMB38 billion ($5.9 billion). Now, keep in mind that Pinduoduo is highly seasonal with Q4 being its strongest quarter.

If we assume that H2 2021 grows by 50% over the same period a year ago, that means that Pinduoduo would see its top line grow to $8 billion in H2 2021. This means that in 2021 its revenues would reach $14 billion.

Now, if we assume that in 2022 its revenue growth grates decelerate and its business comes away from growing at more than 70% and ends up with a more moderate 40%, we should expect to see approximately $20 billion in revenues in 2022.

Altogether, this means that this now profitable enterprise is growing at a very fast rate and is priced at just 5x next year’s revenues.

The Bottom Line

Pinduoduo has been a very volatile stock and has worn down many investors. But its underlying fundamentals are stronger than ever, with impressive topline growth, and reporting a profit for the first time.

Paying 5x next year’s revenues is really too cheap to ignore, even with the ”China factor”. This is why I’m a shareholder of this stock.

Author: Michael Wiggins De Oliveira, Seeking Alpha

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