When the revenue growth rate of Chinese internet companies generally slowed down, Pinduoduo experienced a reverse surge.
On November 28th, Pinduoduo released its financial report for the third quarter of 2023, which showed that its revenue reached 68.84 billion yuan, a significant increase of 93.9% compared to the same period last year's 35.5 billion yuan, almost doubling. The quarter on quarter net increase of 52.281 billion yuan in the second quarter also reached nearly 16.6 billion yuan, exceeding market expectations; Realize a net profit of 15.54 billion yuan and a net profit margin of 22.6% under the GAAP standard in the United States.
After the financial report was released, Pinduoduo's US stock rose by over 18% at the beginning of trading, with the highest stock price reaching 139.93 yuan per share and ultimately closing at $139. Currently, Pinduoduo's market value has reached $184.7 billion. Among the three giants of Chinese e-commerce, Alibaba, which is undergoing tremendous reforms, has a market value of $1974 billion and JD.com has a market value of $44.6 billion.
Undoubtedly, Pinduoduo is one of the best performing Chinese internet companies in terms of stock price this year, with a total market value equivalent to four JD.com companies and only one step away from Alibaba.
Regarding the reason for the surge in revenue, Pinduoduo Co CEO Zhao Jiazhen's response during the financial report conference was no different from the previous quarter. It was simply a joint result of the continuous improvement of the consumer environment and the execution of the company's high-quality development strategy, except that "the return on high-quality development strategy is faster than we expected.".
But analyzing the financial report, it can be seen that the main boost to Pinduoduo's performance this quarter was the surge in commissions, with Temu performing the most aggressively.
Market value approaching Alibaba, Temu becoming the second growth engine
In the third quarter, Pinduoduo's revenue from online marketing services and other services (advertising) was 39.687 billion yuan, a 39% increase from 28.482 billion yuan last year; The revenue from transaction services (commissions) was 29.152 billion yuan, a year-on-year increase of 315% from 7.022 billion yuan in the same period of 2022. The growth rate of commission income has far exceeded the growth rate of advertising revenue for the majority.
The so-called "transaction service" revenue composition mainly includes commission income from Duoduo Maicai, Temu income, and some commission subsidies worth billions of yuan, with the most prominent growth undoubtedly coming from Temu's performance contribution.
This quarter, Pinduoduo has not yet released any data on Temu's revenue, costs, or marketing investment. The official information available to the outside world is still limited to "Duoduo Cross border has been launched for over a year and has now reached more than 40 countries and regions worldwide.". According to a report by 36Kr, Temu's sales in the third quarter of this year have exceeded $5 billion, which may exceed the annual GMV target of $15 billion.
"We hope to leverage the supply chain foundation accumulated over the years to provide consumers from different regions around the world with a direct channel to purchase from factories, a more flexible and personalized supply chain, and a more cost-effective comprehensive shopping experience," said Chen Lei, Chairman of Pinduoduo.
Liu Jun, Vice President of Finance at Pinduoduo, further explained during a conference call that cross-border business is still in a very early stage, and many of the platform's initiatives are in the customization stage. The team is currently understanding different markets and consumer needs. "This will be a challenging iterative process, but it will also be interesting."
Not only for cross-border business, during the traditional off-season period of "618 has passed but November 11th has not arrived" in the third quarter, Pinduoduo still relies on a series of activities such as the platform Harvest Festival, National Goods Festival, Duoduo Reading Month, and National Day promotion to achieve comprehensive performance growth. According to the platform, this quarter saw varying degrees of growth in categories such as agricultural and sideline products, beauty and toiletries, digital home appliances, and outdoor sports.
In terms of growth rate, Alibaba Taotian Group's revenue during the same period was 97.654 billion yuan, a year-on-year increase of 4%. Among them, the most core cash flow business customer management revenue (CMR) and adjusted EBITA (pre tax, interest, depreciation, and amortization) only saw a year-on-year growth rate of 3%. JD's revenue growth rate during the same period was only 1.71%. Pinduoduo still maintains a high growth rate of nearly three digits overall. If we only look at e-commerce business, Pinduoduo's revenue scale is close to 70% of that of Alibaba Taobao Tmall, and 60% of that of Taobao Tmall+Alibaba's overseas e-commerce.
Analysts have noticed that competitors in the e-commerce industry have collectively proposed a cost performance strategy this year. Will this cause erosion to the platform business? How does Pinduoduo view competition?
Zhao Jiazhen responded by saying that this year is a year of boosting consumption and intensifying competition in e-commerce. Pinduoduo is not surprised by the measures taken by its industry competitors. Competition is inevitable and the main theme of the industry.
"In the face of competition, there is actually no one size fits all solution. We always think about constantly improving our core competitiveness. Our approach to dealing with competition has always been very clear, which is not to look at what competitors are doing, but to look at what consumers need." Zhao Jiazhen said.
Increased cost expenditures and continuous decline in profit margins
Along with the surge in revenue and GMV, Pinduoduo's expansion of overseas business has also led to an increase in investment costs and operating expenses. The financial report shows that the total revenue and cost of the company in the third quarter was 26.83 billion yuan, a year-on-year increase of up to 262%. In response, Pinduoduo explained in its financial report that the growth mainly came from the increase in fulfillment fees, payment processing fees, maintenance costs, and call center fees.
The overall operating expenses of the company in the third quarter were 25.354 billion yuan, a year-on-year increase of 44%. Among them, sales and marketing expenses amounted to 21.749 billion yuan, a year-on-year increase of 55%, mainly due to an increase in promotional and advertising expenses; The general administrative expenses were 758 million yuan, a decrease from last year's 910 million yuan. The company's research and development expenses reached a new high, reaching 2.85 billion yuan, a year-on-year increase of 5.5%. In the future, Pinduoduo will continue to invest in agricultural technology, supply chain technology, and overall core research and development.
For early Temu, the path of burning money in overseas markets was just beginning, but if we follow the development path of domestic main websites, when the scale effect exceeds the subsidy effect, it is time for new businesses to make money.
This quarter, Pinduoduo's operating profit was 16.656 billion yuan, a year-on-year increase of 60%. The operating profit under non GAAP accounting standards was 18.125 billion yuan, a year-on-year increase of 47%.
Despite the growth of operating profits, Pinduoduo's profit margin continued to decline year-on-year and month on month in this quarter. In response, the management stated that profit margin is not the top priority of the platform, and Pinduoduo will continue to firmly invest when it sees the good potential of ROI (return on investment) under future changes. Due to the daily changes in investment opportunities, business execution also differs from financial return times.
The overall environment is indeed like this. When e-commerce platforms emphasize cost-effectiveness competition, profit margins are undoubtedly affected to varying degrees.
As of September 30, 2023, Pinduoduo's cash, cash equivalents, and short-term investments on its books amounted to RMB 202.8 billion, compared to RMB 149.4 billion last year. This also means that the strong cash flow brought by domestic main websites is enough for Temu to "burn" for a period of time.