After a stellar run in 2020, several companies in the e-commerce space have lost momentum in recent trading sessions. The COVID-19 pandemic acted as a massive tailwind for e-commerce entities as lockdowns were imposed all around the world. Further, the shift towards online shopping is all set to accelerate in the upcoming decade, making stocks such as Pinduoduo (NASDAQ: PDD) top bets right now.
A look at Pinduoduo’s financials
Pinduoduo is a China-based mobile-only marketplace that aims to expand the digital economy as it connects agricultural producers with consumers all around the country. In the third quarter of 2021, Pinduoduo reported sales of $3.34 billion, an increase of 51% year over year. Its adjusted net income rose by 575% year over year to $489 million or $0.34 per share.
Comparatively Wall Street forecast Pinduoduo stock to post revenue of $4 billion and adjusted earnings of $0.30 per share in Q3. As the company missed revenue estimates by a significant margin, PDD stock lost 38% in the last month.
Pinduoduo ended Q3 with 741.5 monthly, active users which rose 15% year over year. The number of active buyers on its platform also rose by 19% in the last 12-months to 731.3 million.
The company has successfully disrupted the online shopping experience as users can come together and benefit from lower prices associated with bulk buying.
What I like about Pinduoduo?
Now that Pinduoduo has expanded its user base at a stellar rate, it is focused on improving investments in research and development, which should develop its widening ecosystem and increase customer engagement over time.
Similar to most other tech companies, Pinduoduo has an asset-light model, allowing it to expand profit margins at a stellar pace due to high operating leverage. We can see that while Pinduoduo’s sales rose by 51%, its net income surged by 575% in Q3.
Analysts tracking PDD stock expects its sales to rise by 67% to $15.4 billion and by 32% to $20.3 billion in 2022. Comparatively, its bottom line is forecast to improve from a loss per share of $0.39 in 2020 to earnings of $1.36 in 2022.
PDD stock is also trading at an attractive valuation, given its forward price to 2022 sales multiple of 3.9x and a price to earnings multiple of 43x.
Risks to Pinduoduo’s share price
Investors might be concerned over Pinduoduo’s decelerating growth metrics. In 2019, the company’s monthly active users rose by 77% while in 2020, it rose by 50%. Comparatively, its revenue rose by 130% in 2019 and 97% in 2020. We can see that Pinduoduo’s growth rates have slowed significantly in Q3.
Further, the lack of transparency and regulatory issues associated with China-based companies might also weigh on PDD’s stock price in the near term.
Pinduoduo’s growth potential
Pinduoduo stock is down 71% from all-time highs. Despite the dip, it has more than tripled its market value in the last three years. Pinduoduo remains a top long-term bet and benefits from multiple secular tailwinds that include an increase in the purchasing power of China’s middle class and an expanding addressable market. Its improving profitability and attractive valuation coupled with the recent pullback make PPD a top tech stock to buy right now.
Contributing Writer at MyWallSt
Aditya took an interest in the stock market during the financial crash of 2008-09. His favorite stocks include Roku and Apple as both companies enjoy a leadership position in their respective verticals and are poised to beat the broader markets consistently going forward.