On August 27th, Beijing time, the US stock market closed on Monday. Pinduoduo, which had just released its financial report, closed at $100 per share, down 28.51%, with a total market value of $138.877 billion. Overnight, Pinduoduo's market value dropped by $55.37 billion, losing one NetEase. On the same day, the stock market value of NetEase in the United States was 53.164 billion US dollars.
Behind the sharp drop in stock prices, what worries investors more than the specific data in the performance report is the "pessimistic" signal released by Pinduoduo's management during the earnings conference call. Last night, the management of Pinduoduo repeatedly mentioned that Pinduoduo's profits will enter a downward trend in the future. At the same time, Pinduoduo clearly stated that the company is still in the investment period, and in the foreseeable future, the management unanimously believes that it is not appropriate to carry out capital level repurchases or dividends. In the situation where profits and revenue are no longer "stunning", some investors have lost patience with Pinduoduo's shareholder return plan.
Why did Pinduoduo's stock price plummet? What has happened to Pinduoduo in the past few months? Where does the pessimism of the management come from?
The 'miracle' of growth is receding
What kind of financial report did Pinduoduo submit behind the sharp drop in stock price?
From the financial report data, Pinduoduo did encounter some challenges this quarter. In this financial report, Pinduoduo's revenue was 97.06 billion yuan, a year-on-year increase of 86%, which was lower than the market expectation of 99.985 billion yuan. After adjustment, the net profit attributable to ordinary shareholders was 34.43 billion yuan, a year-on-year increase of 125%. After the release of the financial report, the market reacted strongly to Pinduoduo's lower than expected revenue. Last quarter, Pinduoduo's revenue was 86.8 billion yuan, exceeding market expectations by nearly 10 billion yuan.
But in fact, when it comes to the e-commerce industry, this data is not bad. Alibaba's latest financial report shows that in the last quarter, Taobao Group's revenue was 113.337 billion yuan, a year-on-year decrease of 1%, and adjusted EBITA also decreased by 1% year-on-year to 48.81 billion yuan. JD's retail business revenue reached 257.072 billion yuan, an increase of 1.5% compared to the same period last year, with an operating profit of 10.11 billion yuan, a year-on-year increase of 24.2%. Vipshop, which also focuses on low prices and cost-effectiveness, had a revenue of 26.9 billion yuan in the second quarter, a decrease of 1 billion yuan from the same period last year. In terms of revenue and profit growth, Pinduoduo still outperforms most domestic e-commerce peers.
Nowadays, the biggest problem for investors is that Pinduoduo's "miracle" is disappearing. Goldman Sachs stated in its latest research report that "the growth of Pinduoduo's online marketing services has shown signs of normalization for the first time." In the second quarter, Pinduoduo's revenue from online marketing services and other services was 49.12 billion yuan, a year-on-year increase of 29%, which was lower than market expectations. Goldman Sachs believes that Pinduoduo's performance is still significantly better than Ali's customer management revenue growth of 1% and the median growth of Kwai e-commerce advertising. However, compared to the growth rate of over 55% in the previous two quarters, Pinduoduo's online marketing service growth has significantly slowed down.
This data reflects the GMV situation of Pinduoduo's domestic main station business. After Pinduoduo's financial report was released, Bank of Communications International adjusted the estimated GMV data of Pinduoduo's domestic main station in the second quarter from 20% -25% to 15% -20%. Previously, Taotian Group returned to double-digit GMV growth after a two-year hiatus in the first quarter of 2024, and achieved high single digit GMV growth in the second quarter. With the balance of strengths and weaknesses, Pinduoduo's leading advantage in e-commerce growth is diminishing.
In addition, the financial report shows that Pinduoduo's revenue increased by 11.8% month on month in this quarter. With the inclusion of the e-commerce 618 promotion, this month on month growth rate indicates that Pinduoduo's growth rate may further intensify in the coming quarters. As a reference, in the second quarter of 2023, Pinduoduo's month on month growth rate reached 38.9%.
Overall, based on the Q2 financial report, Pinduoduo is still growing and maintaining a leading growth rate in the e-commerce industry. However, in the fierce market competition, Pinduoduo is also joining the wave of weak e-commerce growth.
Domestic e-commerce faces bottlenecks
However, compared to a quarterly financial report, what may be more alarming to investors is the future expectations of Pinduoduo's management. Compared to "rebounding" and creating high growth in the reverse e-commerce market in the future, Pinduoduo's management tends to emphasize that "high-income growth is unsustainable, and the decline in profitability is inevitable
In fact, managing investors' expectations during financial conference calls is a common action of Pinduoduo's management. We have emphasized multiple times in the past that the growth of profits in the past few quarters is the result of a mismatch between short-term investment cycles and financial reporting cycles, and cannot be used as a long-term guide, "said Chen Lei, Chairman and Co CEO of Pinduoduo Group, during the financial report conference call on the 26th.
Differently, in this earnings conference, Pinduoduo's management directly mentioned that "future profits will gradually enter a downward trend". In the context of Pinduoduo just facing the challenge of declining revenue and profit growth, this statement conveys anxiety far beyond Pinduoduo's current situation to the outside world.
Why is Pinduoduo so pessimistic?
On the one hand, Pinduoduo does need to feel the pressure of competition. A Pinduoduo employee told reporters that within Pinduoduo, employees do feel the reduction of advantages and the pressure brought by peers. In the context of sluggish consumption, major e-commerce platforms have increased subsidies, which to some extent reduces Pinduoduo's low price advantage.
According to a report by Analysys Intelligence, the GMV of the comprehensive e-commerce market (including Taobao, Tmall, JD.com, and Pinduoduo) during the 618 shopping festival this year increased by 11.2% year-on-year, and the turnover growth rate of Taobao and Tmall reached 12%, accounting for 62% of the market share of the comprehensive e-commerce platform. Taobao and Tmall are reflecting on their "forgetting who our real customers are" and are constantly trying to regain market share from Pinduoduo and JD.com through strengthening user subsidies, 88VIP shipping gifts, and other means. JD.com has also continued to adhere to its "low price strategy" this year, increasing its investment in billions of subsidies. Even in terms of only refunding and requiring merchants to respond quickly to consumers, Pinduoduo and Duobi can feel the determination of the "e-commerce predecessors" to put down their posture and challenge Pinduoduo.
Behind Pinduoduo's statement that "the management has reached a consensus and is willing to pay a huge current price and sacrifice short-term profits for long-term health," Huatai Securities believes that the slowdown in revenue from online marketing services has initially reflected Pinduoduo's stage bottleneck in platform advertising monetization rate, and Pinduoduo needs to strike a balance between profit release and reshaping growth. Huatai Securities analyzed that in the short term, the high growth driven by the surge in demand for destocking and the increase in platform bargaining power (increased monetization rate) may not be sustainable. In the future, the long-term expansion space of Pinduoduo's monetization rate should come from the improvement of merchant gross profit margins. Effectively reducing merchant operating costs is the only way for Pinduoduo to shift profit margins for merchants and increase investment in low-priced competition.
At the same time as the release of the financial report, Pinduoduo announced a significant reduction in transaction fees for high-quality merchants, with an estimated reduction of 10 billion yuan in the next year. From this perspective, it is inevitable that Pinduoduo's future revenue and profits will be affected, and it is necessary to pay a price for providing more development space for platform merchants and strengthening the ecological governance of the platform and merchants.
Increased overseas risks
Another anxiety of Pinduoduo is the significant increase in uncertainty.
This mainly points to the development of Temu. At present, Temu has entered more than 70 countries and regions around the world, and has rapidly expanded in multiple markets such as the United States and Europe. However, during the earnings call on the 26th, Chen Lei mentioned that Pinduoduo's global business is facing a more severe and rapidly changing international environment, and its business operations are increasingly affected by abnormal commercial factors. The uncertainty of future business development has significantly increased, and the gradual slowdown in revenue will be an inevitable result.
The high valuation of Pinduoduo in the past two years is not unrelated to the imagination brought by Temu. Although Pinduoduo's financial report does not directly reflect Temu's performance, the growth curve of Pinduoduo's commission income since Temu's launch highly overlaps with the timeline of Temu's business expansion. In this business that Pinduoduo used to develop without considering costs, Pinduoduo has won considerable overseas user numbers, order numbers, and GMV growth. In June of this year, Morgan Stanley predicted that Temu could achieve profitability as early as 2025 and GMV could reach $130 billion by 2030.
Chen Lei's speech highlighted the increasing interference from abnormal commercial factors. In the past few years, Pinduoduo has faced increasing compliance risks overseas.
Cross border merchants are also facing compliance issues. Recently, a pet industry merchant on the Temu platform told reporters that although foreign money is easy to earn, he has recently neglected the operation of cross-border platform stores. He said that there are many laws and regulations that need to be studied for cross-border operations, and environmental fees and fines are complex, requiring merchants to invest more manpower costs and risk management.
In the face of a complex environment, we will focus on ourselves, continuously invest in and optimize our supply chain capabilities, service capabilities, and compliance capabilities. In this way, we can actively respond to the demands of consumers in various countries and achieve high-quality development of global business. "Chen Lei answered the question on how to deal with external risks during the conference call. At the same time as the policy risk of Chinese companies going global, Pinduoduo is feeling the accumulation of pressure, but has not yet found an answer.
After a conference call caused a sharp drop in Pinduoduo's stock price, on August 27th, Citigroup and Macquarie adjusted Pinduoduo's rating from better than the market to neutral, Morgan Stanley lowered Pinduoduo's target price from $220 to $150, and Goldman Sachs held a buy rating on Pinduoduo. Goldman Sachs believes that one of the reasons for Pinduoduo's stock price decline is that "management's comments scared the market", but Pinduoduo's stock price still has room for upward movement based on its advertising technology capabilities (ROI based marketing tools) and cost competitive suppliers/merchants/supply chains in China, as well as favorable risk return. The current market value does not include the valuation of Temu.
On the evening of August 27th, Pinduoduo's stock price rose slightly before trading. As of press time, Pinduoduo's US stock price was quoted at $101.3 per share, up 1.30%.