Pinduoduo Inc (NASDAQ: PDD) has made a name for itself as an up-and-coming social commerce company in China.
Amazingly, this US$150 billion market cap company didn’t even exist six years ago, having been founded in September of 2015.
So what’s been the reason for its success? Put simply, the company has given consumers what they want. Rather than being purely a marketplace for goods, as Alibaba Group Holding Ltd’s (NYSE: BABA) (SEHK: 9988) Taobao and Tmall are, Pinduoduo has taken “group buying” to the next level.
By allowing like-minded consumers to group together online for discounts on specific goods, Pinduoduo has constructed a loyal and growing user base.
That has been reflected amply in the phenomenal growth of Pinduoduo’s active users. In fact, probably unbeknownst to most investors, as of the end of 2020 Pinduoduo actually overtook Alibaba in terms of the number of annual active buyers.
At the end of last year Pinduoduo notched up 788.4 million active buyers versus Alibaba’s 779 million. Having released earnings earlier this week, that figure for Pinduoduo has grown to 823.8 million, up 31% year-on-year.
Looking for new avenues of growth
Pinduoduo isn’t stopping there. Having amassed a huge active and engaged audience, the company now wants to move into the grocery space.
It is investing heavily into Duoduo Grocery, which reportedly covers over 2,000 cities and counties. While it is investing heavily into its capabilities, it does also mean mounting costs – which have surged in the past two quarters (see below).
That has been accompanied by a skyrocketing surge in its marketplace revenue, which was up 161% year-on-year in its first quarter, hitting RMB 17 billion (US$2.67 billion).
A solid cash position of RMB 83.4 billion means Pinduoduo has the firepower to continue spending.
Longer-term investors may be willing to wait for profits to appear. Although the company is operating within the fiercely competitive Chinese e-commerce market, there won’t be many investors betting against Pinduoduo reaching its lofty goals.
Source: Pinduoduo Q1 2021 earnings presentation
Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares in any companies mentioned.