On August 26, Pinduoduo's stock price created the largest single-day drop since its IPO, with a drop of nearly 30%, causing the market value to evaporate by more than US$55 billion overnight. Goldman Sachs pointed out in a research report that the main reasons for the sharp drop in stock prices include: performance below expectations, management's pessimistic comments on the profit outlook for the next few quarters, and the company's lack of a return policy for shareholders.

However, Goldman Sachs believes that the market may underestimate Pinduoduo's business potential in the mainland market, including the strengthening of its ecosystem, the clear prospect of gross merchandise volume (GMV) growth, and the company's adjustment of advertising monetization policies, all of which may bring greater benefits to merchants. Therefore, Goldman Sachs believes that Pinduoduo's stock price may have fallen more than the value reflected in its fundamentals.

Pinduoduo's second-quarter performance was only slightly lower than market expectations, why did it cause a huge reaction?

Pinduoduo's financial report released in the second quarter of 2024 showed that the company's total revenue reached 97.06 billion yuan, a year-on-year increase of 86%, slightly lower than the market expectation of 99.985 billion yuan. Net profit was RMB 32.01 billion, a significant year-on-year increase of 144%. Overall, although the revenue data was slightly lower than expected, it was still a report card showing the company's rapid growth.

However, Pinduoduo is clearly aware of the challenges currently facing the e-commerce industry, and the fierce competition within the industry has caused Pinduoduo great concerns. Liu Jun, vice president of finance of Pinduoduo Holdings, said, "Last quarter, our revenue growth slowed down quarter-on-quarter. Looking ahead, revenue growth will inevitably face pressure due to intensified competition and external challenges." In the earnings call, Chen Lei, founder and CEO of Pinduoduo, pointed out: "As we continue to invest heavily, profitability may also be affected." However, he also emphasized that the company's profit growth in the past few quarters was the result of the short-term investment cycle and the financial reporting cycle being out of sync, and does not represent a long-term trend.

As mentioned by Pinduoduo's management, Pinduoduo's current main source of income is still the merchant's commission income and advertising income. This quarter, transaction service revenue (i.e. commission) reached RMB 47.94 billion, a year-on-year increase of more than 230%; while marketing services and other services (advertising) revenue was RMB 49.12 billion, a year-on-year increase of 29%, and the growth rate slowed down. Recently, platforms including Taobao and Douyin e-commerce have begun to re-emphasize GMV growth, return to the interests of merchants, and improve service capabilities, no longer over-emphasizing low prices. Pinduoduo must also respond to these challenges.

Pinduoduo management said it is ready to sacrifice profits

Pinduoduo Group Chairman and Co-CEO Chen Lei pointed out that the platform has already achieved a considerable scale, and improving ecological construction is a long-term process. The management has reached a consensus and is ready to sacrifice short-term profits for long-term investment. Faced with the increasingly fierce competition in the e-commerce industry, Pinduoduo plans to invest 10 billion resources to support new quality merchants, and reduce 10 billion yuan in handling fees for high-quality merchants in the next year to continuously improve the quality and efficiency of the supply chain and improve ecological governance.

In order to further support merchants, Pinduoduo has launched a refundable right for resource position technology service fees and promotion software service fees, and through a series of support policies, it helps merchants improve quality and efficiency. In addition, Pinduoduo's R&D investment in the second quarter reached 2.9 billion yuan, a year-on-year increase of 6%, which is mainly attributed to the company's new round of investment in operations and R&D.

Zhao Jiazhen, director and co-CEO of Pinduoduo, introduced the measures taken by the platform to strengthen the governance of the merchant ecosystem, including optimizing the merchant entry and product listing process, using technical means to actively inspect the listed products, and combining the rules team to conduct refined reviews to crack down on illegal cheating merchants and create a better operating environment for high-quality merchants. Through these measures, Pinduoduo aims to build a healthier and more sustainable business ecosystem.

Goldman Sachs supports Pinduoduo

Despite the intensified competition in the domestic e-commerce field and the worrying geopolitical risks faced by Pinduoduo's subsidiary Temu, Goldman Sachs still gave Pinduoduo a "buy" rating in its latest research report and set a 12-month basic target price of US$184. Even though Pinduoduo's stock price performance this year has not been ideal and its current price-to-earnings ratio is less than 10 times.

However, Goldman Sachs said that Pinduoduo's gross transaction volume (GMV) has achieved rapid growth and transaction service revenue has exceeded expectations, which shows that Temu's market growth momentum is still continuing. Pinduoduo still maintains one of the fastest performance growth records of Chinese Internet companies in the second quarter. The company's strategic investments and continued technological innovation, especially in the field of advertising technology (marketing tools based on ROI), as well as its reliance on China's cost-competitive suppliers, merchants and supply chain, are expected to drive its future performance growth.

Goldman Sachs believes that the company's advertising technology capabilities, cost-competitive supply chain, and leading position in the Chinese market provide Pinduoduo with a favorable risk-return ratio. "We set a 12-month base target price of $184, which has a potential upside of 84% compared to the current share price. It is worth noting that the current market value does not fully reflect the valuation of the Temu platform, which further strengthens our confidence in Pinduoduo's long-term growth potential."

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