Categories Analysis, Retail

Pinduoduo (PDD): This could be a decent investment candidate to consider

Last year, the purchase of agriculture-related products on Pinduoduo doubled compared to 2019

Shares of Pinduoduo Inc. (NASDAQ: PDD) stayed in green territory on Tuesday. The stock has gained 212% over the past 12 months. Pinduoduo has achieved considerable growth thus far and its prospects for the future appear bright enough despite certain headwinds. Here are a few points to consider about this stock:

Strengths

Pinduoduo has seen strong revenue growth over the past few quarters benefiting from the growth in ecommerce during the COVID-19 pandemic. Revenues in FY2020 increased 97% year-over-year to $9.1 billion, driven by strength in online marketing and transaction services. Gross merchandise value in the 12-month period ended December 31, 2020 grew 66% to $255.6 billion.

Active buyers in the 12-month period that ended December 31, 2020 totaled 788 million, reflecting a YoY growth of 35% and surpassing the likes of Alibaba (NYSE: BABA) which had 779 million buyers. Annual spending per active buyer rose 23% during the period.

Pinduoduo is currently the largest agriculture platform in China and this remains a strategic priority for the company. It plans to invest in technology and operations in order to reduce inefficiencies in the agricultural supply chain that in turn will help lower structural costs and make groceries more affordable.

The company is looking to build an agriculture-focused logistics platform that will lower costs and deliver agricultural products fast. It is also looking for opportunities to invest in alternative proteins, food safety and precision farming.

Pinduoduo launched Duo Duo Grocery last August to take advantage of the growing trend of people making their food purchases online. Last year, the purchase of agriculture-related products on Pinduoduo doubled compared to 2019. Grocery remains a priority and a key growth area for the company. Investments made in this space are likely to generate significant yields going forward.

Looking ahead, the trend of revenue growth is expected to continue. For FY2021, revenues are projected to reach $16.1 billion, which would reflect a YoY growth of 76%.

Challenges

The biggest concern surrounding the stock is its continued losses. In FY2020, reported net loss amounted to $1.1 billion while adjusted net loss totaled $454 million. Net loss per ADS was $0.92 on a reported basis and $0.38 on an adjusted basis.

There is a need for the company to achieve profitability soon but considering the growth investments it is making to take its grocery business forward and to expand its market share, it is likely that this may still take more time.

The string of losses and the uncertain regulatory environment in China appear to be taking a toll on the stock in the past few months. Although analysts are bullish on the stock, they caution that investors will have to be patient as Pinduoduo is expected to achieve its profitability targets even though it might take a little while.

Click here to read the transcript of Pinduoduo’s Q4 2020 earnings conference call

Looking for more insights on the earnings results? Click here to access the full transcripts of the latest earnings conference calls!

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