Pinduoduo Woke Up and Chose War

Analyzing Pinduoduo’s Q2 2024 Earnings

Introduction

Pinduoduo's Q2 2024 earnings appeared strong on the surface: revenue growth was up 86% to RMB 97.06 billion (US$13.36 billion), and operating profit surged 156% to RMB 32.56 billion (US$4.48 billion).

Earnings Performance: A Top-Level View

These financial results could have been framed as a testament to Pinduoduo's strength and resilience, especially given that major competitors recently reported a dramatic slowdown in GMV (Gross Merchandise Volume) growth.

However, instead of acknowledging the inevitable slowdown, Pinduoduo's management chose to deliver a starkly different message.

A Shift in Sentiment: From Optimism to Aggression

Over the last three earnings calls, there has been a noticeable shift in tone:

1. Q4 2023: Management maintained a relatively positive outlook despite acknowledging potential profitability fluctuations. The focus was on sustaining growth while preparing for possible headwinds.

2. Q1 2024: Management began voicing concerns more openly, noting intensifying competition and potential pressure on profitability due to heavy investments in platform development.

3. Q2 2024: This call marked a stark departure from the usual corporate optimism. Management openly discussed:

   • The inevitability of declining profitability

   • The necessity of heavy investments

   • Their readiness to sacrifice short-term gains for long-term positioning

Taking on Competitors

Pinduoduo’s aggressive stance appears to be a direct response to the increasingly competitive environment. With Alibaba reportedly poaching merchants from Pinduoduo, and JD.com and Douyin intensifying their low-cost e-commerce efforts, Pinduoduo’s management seems determined to fight back at any cost.

They explicitly stated that competition is escalating, and they are prepared to do whatever it takes to maintain their market position. This was a clear declaration of war against Alibaba, JD.com, Douyin, Kuaishou, and others. The message was unambiguous: Pinduoduo will fight for its market share, regardless of the cost to competitors.

Taking on Low-Quality Merchants

Pinduoduo is also battling against low-quality merchants. While they have previously discussed initiatives to build a high-quality and sustainable ecosystem, they are now taking a much more aggressive stance. Management announced plans to actively remove low-quality merchants from the platform, directly targeting those who do not meet their standards.

This move likely comes in response to recent protests by merchants in front of their headquarters in China. It marks a significant shift from past rhetoric to decisive action, signaling that Pinduoduo is serious about elevating the overall quality of its marketplace and ensuring that only trustworthy merchants remain.

Taking on Investors

Previously, Pinduoduo's management was diplomatic when addressing the lack of dividends and share buybacks, typically explaining that the company was still in its growth phase with high return on investment opportunities ahead. This time, however, they were blunt. Management stated not only that there would be no dividends or buybacks now, but also that there wouldn't be any in the foreseeable future—not even for several years down the road. Currently, they have $39.2 billion in cash, enough to potentially acquire one of their main competitors, such as JD.com or Kuaishou, in its entirety.

While it's normal to expect that a company of Pinduoduo's size can't sustain triple-digit growth indefinitely, the management repeatedly emphasized—five times during the call—that profits will decline sharply.

Price drop and current valuation:

After the earnings call, Pinduoduo’s stock dropped 30%, finally succumbing to the gravitational pull of other major Chinese stocks. Now trading at around 10 times earnings—or 8 times when accounting for cash—the stock is in line with peers like JD, Alibaba, and Kuaishou. At this level, the market has essentially priced in no growth.

Let’s look at the financials in more details:

Slowing Domestic Growth?

Advertising revenue for Pinduoduo grew by 29% year-over-year, but recent data from a Goldman Sachs report suggests that GMV (Gross Merchandise Value) growth from May 20 to June 18 was only between 15% to 20%. This falls short of Pinduoduo’s target of a 30% growth rate in GMV, aiming to reach 5.5 trillion yuan in 2024. There have already been reports that some members of the management team, who were focused on the Temu expansion, were redirected back to support the Chinese domestic business. The fact that GMV growth is dropping below 20% indicates that Pinduoduo’s domestic business might be transitioning from its previous high-growth phase to a more stable but slower growth period.

TEMU

Pinduoduo’s overseas expansion through its TEMU platform showed a 234% year-on-year increase. However, quarter-on-quarter growth was only 6.8%. This slower growth can partly be attributed to TEMU’s shift to a semi-managed model, where the platform recognizes less revenue because merchants now bear more of the fulfillment costs, reducing the margin TEMU captures.

What stands out, however, is the shift in Pinduoduo’s mindset towards TEMU. Previously, management emphasized that they were in a growth and learning phase, approaching international markets with an open and adaptive mindset, keen to understand local regulations and customs. Now, however, they are framing these factors more as problems and challenges, with a focus on uncertainties that are not necessarily business-related. This change in tone suggests a possible waning of confidence in TEMU’s ability to sustain its rapid growth under these new conditions.

Operating leverage

Despite slower revenue growth, Pinduoduo’s profits remained robust, driven by strong operating leverage. Gross profit increased by 89%, closely aligning with the overall revenue growth of 86%. This profitability was achieved largely due to disciplined control over marketing expenses, which only rose by 48% despite the substantial revenue gains. This careful cost management allowed the company to generate significant operating profits, which reached RMB 32.6 billion—a 156% year-over-year increase. However, management has cautioned that these elevated profit margins may not be sustainable in the long run, as intensified competition and external pressures are expected to weigh on future profitability.

Other things I heard and learned about Pinduoduo during the quarter:

1. Focus on Market Share: Pinduoduo has shifted its business strategy in Q2 2024 from prioritizing commercialization and profit improvement back to focusing on GMV (Gross Merchandise Value) growth. This change is in response to the fierce competition in the domestic e-commerce market, where other major players like Alibaba, JD.com, and Douyin and Kuaishou have also started emphasizing low-cost strategies to grab market share.

2. Monetization vs. Growth: Since 2022, Pinduoduo had been gradually increasing its monetization rate, moving away from its earlier emphasis on GMV and user scale. However, with the intensifying competition, Pinduoduo is now re-prioritizing GMV growth, similar to how its competitors are shifting their strategies.

3. Challenges in GMV Growth: The growth of Pinduoduo’s domestic business has not met expectations, with GMV growth rates falling below 30% in each quarter of the first half of 2024. This slowdown has been exacerbated by intense competition, particularly during promotional periods like 618.

4. Duoduo Maicai: Having achieved national profitability by focusing on loss reduction and efficiency, shifted back to growth in June 2024, mirroring Pinduoduo’s main platform. This unexpected move has pressured Meituan, the last major competitor in community group buying, to reconsider its strategy, potentially delaying its plans to reduce losses.

5. Competitive Landscape: The shift in focus to GMV reflects the broader trend in the e-commerce industry, where platforms are returning to fundamental, aggressive competition for market share, leaving behind their earlier strategies centered around profitability and cost reduction.

6. Merchant and Platform Dynamics: To cope with the competition, Pinduoduo has increased its investments in subsidies and promotional activities, particularly targeting categories where competitors are strong. However, the platform faces challenges as some 1.1 million merchants have moved to Taobao between Q3 2023 and Q1 2024.