Pinduoduo 2024Q3 earnings report interpretation - Growth, valuation, competitive landscape

01

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Revenue

Q3 Quarter:

Total revenue 99.35 billion, up 44.3% YoY; online marketing revenue 49.35 billion, up 24.3% YoY; transaction service fee revenue 50 billion, up 72.5% YoY.

First Three Quarters:

Total revenue 283.23 billion, up 78.4% YoY; online marketing revenue 140.92 billion, up 34.4% YoY; transaction service fee revenue 142.3 billion, up 164% YoY.

02

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Revenue Composition

03

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Gross Profit, Gross Margin

Q3 Quarter:

Revenue up 44.3% YoY, costs up 48% YoY, total gross profit 59.65 billion, gross margin 60%.

First Three Quarters:

Revenue up 78.4% YoY, costs up 87.3% YoY, total gross profit 177.12 billion, gross margin 62.5%.

04

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Expenses, Expense Ratio

Q3 Quarter:

Total expenses 35.35 billion, expense ratio 36%; marketing expenses 30.48 billion, expense ratio 30.7%; R&D expenses 3.06 billion, expense ratio 3.1%; administrative expenses 1.81 billion, expense ratio 1.8%.

First Three Quarters:

Total expenses 94.29 billion, expense ratio 33.3%; marketing expenses 79.94 billion, expense ratio 28.2%; R&D expenses 8.88 billion, expense ratio 3.1%; administrative expenses 5.47 billion, expense ratio 1.9%.

05

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Profit, Profit Margin

Q3 Quarter:

Operating profit 24.29 billion, profit margin 24.5%; net profit 24.98 billion, profit margin 25.1%.

First Three Quarters:

Operating profit 82.83 billion, profit margin 29.2%; net profit 84.99 billion, profit margin 30%.

06

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Others

This Quarter's Performance:

From a YoY perspective, the growth rates of revenue, gross profit, and operating profit are quite good, not bad at all. After all, many leading Chinese companies are seeing single-digit growth, while Pinduoduo still has 25% growth domestically and about 70% overseas.

But the problem is, Pinduoduo's domestic and overseas growth has been too aggressive in the past two years. Performance targets that should have taken five years were achieved in just two. This has led to a significant slowdown in domestic and overseas YoY growth starting last quarter, and this quarter continues the trend. Next quarter's YoY growth is expected to slow further (last year's Q4 was a peak).

Additionally, Pinduoduo is known for its low prices, relying on squeezing merchants' profit margins to maintain high profit growth. But this year, domestic e-commerce has undoubtedly entered an extremely competitive phase. Putting too much pressure on merchants now could hurt competitiveness, so last quarter's earnings call mentioned sacrificing profits to invest heavily in merchants and user experience. True to their word, this quarter's marketing expenses rose 17% QoQ, while revenue only grew 2.3% QoQ. This investment directly led to a 25.4% QoQ drop in operating profit. While Q2 profits were almost on par with Alibaba's, this quarter they are significantly lower.

With revenue growth slowing and likely to slow further, and profits also declining, growth stock investors are feeling the pain—a classic double kill. So from this angle, the stock price pressure is normal.

But whether it's worth investing in can't be judged solely from a growth perspective; valuation and competitive landscape must also be considered.

From a valuation perspective:

Operating profit for the first three quarters was 82.83 billion. Since Q4 is typically the peak, a rough estimate puts full-year operating profit at around 110 billion, or about $15 billion.

At the current pre-market price of $104, the market cap is roughly $144.5 billion, translating to a P/E of about 10x. From a valuation standpoint, this is undeniably cheap.

From a competitive landscape perspective:

Alibaba's Taotao revenue this quarter was about 70 billion (excluding self-operated and wholesale businesses). Pinduoduo's domestic main site generated nearly 50 billion in online marketing revenue, with part of its main site revenue combined with TEMU under transaction service fees. Due to Pinduoduo's limited disclosure, it's hard to pinpoint the exact domestic transaction service fee revenue.

But a rough estimate: in Q3 2022 when TEMU launched, domestic transaction service fees were around 7 billion. From Q3 2022 to Q3 2024, Pinduoduo's online marketing revenue grew 73%. Applying this ratio, this quarter's domestic transaction service fees would be about 12.1 billion.

Thus, Pinduoduo's domestic main site revenue this quarter is roughly 61.5 billion, about 12% lower than Taotao's. Taotao grew about 2% this quarter, while Pinduoduo's domestic main site grew 24.3%.

If Pinduoduo maintains 15% growth next Q3 and Taotao continues slow growth, Pinduoduo's domestic revenue could catch up to Taotao's by the second half of next year.

Moreover, Pinduoduo is still on the offensive, so the growth and competitive landscape favor it.

Of course, this only compares their core businesses. Both have other sizable revenue streams—Alibaba has cloud, overseas e-commerce, logistics, etc., while Pinduoduo has TEMU. These businesses are significant, but for now, aside from e-commerce, all are loss-making, so they can be ignored.

So my take is simple: the current valuation only reflects their core e-commerce businesses. At the very least, Pinduoduo's domestic e-commerce revenue is likely to match Taotao's.

Thus, Alibaba's valuation is my anchor for investing in Pinduoduo. If Alibaba is worth $200 billion, Pinduoduo should at least be valued similarly.

So beyond the growth slowdown, looking at valuation and competition, I believe Pinduoduo is undervalued with sufficient margin of safety. Of course, this doesn't mean the stock won't fall further—it might even plunge.

Also, my view could be wrong—just food for thought.

This is not investment advice. The stock market is risky; invest with caution.$PDD(PDD.US) $Alibaba(BABA.US) $JD.com(JD.US)