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Pinduoduo Stock Plummets on Earnings Miss

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Pinduoduo (PDD) stock fell more than 20% in early trading today. The Chinese e-commerce stock is trading at $32.50, 28% below its 52-week high.

The stock decline comes after Pinduoduo’s third-quarter earnings announcement today. The company’s sales of $1.05 billion just missed analysts’ average estimate of $1.06 billion. Additionally, its adjusted EPS were -$0.20, significantly below analysts’ estimate of -$0.08.

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What impacted Pinduoduo’s sales in Q3?

Pinduoduo’s online marketplace offers interactive shopping experiences for customers wanting to buy apparel, shoes, childcare products, electronic appliances, and many other items.

In the last year, PDD’s gross merchandise volumes have risen by 144% to $120 billion. Its active buyer count has risen 39% to 536.3 million, and the annual spending per buyer has grown 75% to $127. In the third quarter, the company’s sales rose 123% YoY (year-over-year), and its average monthly user count rose by 85% to 429.6 million.

With PDD’s earnings release, CEO Zheng Huang stated, “We celebrated our fourth anniversary in early October with an annual active buyer base exceeding half a billion for the twelve-month period ended September 30, 2019.” He added, “We continued to invest in our users throughout the third quarter, and stepped our marketing up a notch from the second half of September for the launch of our anniversary sale. This has added to our steady momentum of user growth as our average monthly active users grew by 64 million from the prior quarter to reach 430 million.”

Pinduoduo attributed the higher sales to an increase in users’ engagement and frequency of visits. Transaction service sales rose 101% to $112.3 million in the third quarter, while online marketing service revenue rose 126% to $938.9 million.

Pinduoduo’s total revenue costs rose 137% YoY to $256.5 million. The increase was due to higher cloud service, merchant support service, and customer care costs.

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Its total operating expenses rose by 119% YoY to $1.18 billion. The company’s sales and marketing expenses rose 114% to $966.6 million, driven by online and offline ad promotions. Pinduoduo has continued to invest heavily in R&D (research and development). In the third quarter, the company’s R&D costs rose 240% to $157.7 million due to a higher headcount and related cloud service expenses. These high costs widened PDD’s operating loss by 120% YoY to $390.6 million. Pinduoduo ended Q3 with an operating cash flow of $366.3 million and a cash balance of $4.8 billion.

What next for PDD and investors?

Pinduoduo went public on July 27, 2018, and closed trading at $24.60 per share that day. The stock rose to a record high of $45.25 earlier this month before wiping out some of those gains today.

While the company’s bottom line remains a concern, analysts expect PDD’s sales to rise 124% to $4.28 billion in 2019 and 61.8% to $6.92 billion in 2020. Meanwhile, they expect its earnings to rise by 24% in 2019 and a solid 200% in 2020. PDD’s forward PE multiple of 57x doesn’t seem too high, considering its growth metrics.

Pinduoduo is valued at $38 billion, or 8.9 times analysts’ forward sales estimate. The company has no debt and can continue to invest heavily in research and marketing to improve its product and sales growth. Though China’s economy is slowing, its middle class’s purchasing power has continued to strengthen.

China’s e-commerce sales are set to rise over the next decade, meaning PDD’s huge addressable market could expand further. It now needs to focus on improving its profit margins to keep investors interested.

Pinduoduo is one of the few Chinese companies to have missed analysts’ estimates in Q3. Tech giants Baidu, Alibaba, and JD.com all beat Wall Street’s estimates in the September quarter.

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