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Elevator Pitch
I retain my Hold rating for Pinduoduo Inc.’s (NASDAQ:PDD) shares. I did a review of PDD’s 3Q 2021 financial results in an earlier article written on November 24, 2021. I evaluate Pinduoduo’s most recent Q4 2021 financial performance in the current article.
If one looks beyond PDD’s earnings beat in the recent quarters, there are quite a number of negatives that deserve more attention. These headwinds include slower top line growth, the negative impact of the company’s investments in the agricultural space on short-term profitability, and delisting risks. I am of the view that the negatives are largely priced in, which supports my Hold rating for PDD.
Did Pinduoduo Beat Earnings?
Pinduoduo delivered a significant earnings beat in the fourth quarter of 2021.
As per its most recent quarterly earnings press release, Pinduduo’s fourth-quarter non-GAAP adjusted earnings per share or EPS of $0.92 exceeded the sell-side’s consensus bottom line estimate by approximately +149%.
There were two key factors contributing to Pinduoduo’s substantial EPS beat for Q4 2021.
Firstly, PDD’s sales and marketing expenses as a proportion of the company’s total revenue decreased from 55% in Q4 2020 and 47% in Q3 2021 to 42% in Q4 2021. Better cost control played a key role in Pinduoduo’s lower sales and marketing costs, but this was also aligned with slower revenue and user growth as I will detail in the next section.
Secondly, Pinduoduo mentioned in its Q4 2021 results media release that it benefited from “a one-off rebate from one of our service providers” in the recent quarter. More importantly, PDD also highlighted at its recent Q4 2021 earnings call that such rebates are determined based “on a case-by-case negotiation with our service providers” and it noted that “we do not expect it (this one-off rebate) will recur in the future.”
PDD released its financial results for Q4 2021 on March 21, 2022. Pinduoduo’s shares surged by +19% from $39.99 as of March 21 to $47.53 as of March 22, and rose by an additional +4% to close at $49.40 as of March 23.
However, PDD’s shares subsequently corrected by -12% in the next three trading days, and its closing price was $43.67 as of March 28. Pinduoduo’s stock price is also still down -25.1% in 2022 thus far, as compared with a modest -3.7% decline for the S&P 500 over the same period. Therefore, it is important to look beyond Pinduoduo’s EPS beat and assess the company’s other key metrics to understand why PDD’s positive share price momentum post-results announcement was not sustained.
PDD Stock Key Metrics
If one reviews PDD’s Q4 2021 revenue and user growth metrics in greater detail, it will be easy to understand why Pinduoduo’s financial performance in the recent quarter was not as good what the EPS beat suggests.
In its recent quarterly earnings media release, PDD noted that its adjusted “revenue, excluding contribution from merchandise sales, was RMB27.1 billion” in Q4 2021. Pinduoduo’s adjusted revenue grew +28% YoY in Q4 2021, which represented a meaningful slowdown from the company’s +55% YoY adjusted revenue growth registered in the third quarter of 2021. Also, PDD’s Q4 2021 adjusted revenue was -9% below the market’s consensus adjusted revenue forecast, according to data obtained from S&P Capital IQ.
Also, PDD has witnessed a significant slowdown in its user growth for the fourth quarter of 2021, as indicated in its Q4 2021 results presentation slides. Pinduoduo’s average Monthly Active Users or MAUs declined by -1.1% QoQ to 733.4 million as of end-Q4 2021. Separately, its active buyers increased by a marginal +0.2% QoQ to 868.7 million for the trailing twelve months period up to the end of 2021.
Considering the moderation in top line expansion and user growth in the fourth quarter of last year, it is unsurprising that Pinduoduo’s shares are still down significantly (-25.1%) year-to-date in 2022. PDD’s short-term outlook isn’t that great as well, as I will elaborate in the next section.
What To Expect After Earnings
After the company’s Q4 2021 earnings, investors should expect slower revenue growth and improved profitability for Pinduoduo in 2022.
The consensus sell-side financial estimates sourced from S&P Capital IQ suggest that PDD’s headline revenue growth will slow from +57.9% in fiscal 2021 to +18.8% in FY 2022.
The expected substantial slowdown in top line expansion for PDD is supported by management’s recent comments. Pinduoduo acknowledged at its recent fourth-quarter results call that the “recent fluctuation in user activities and slowing revenue growth is a reflection” that PDD has not done enough with respect to “satisfying users’ needs.” Moreover, PDD stressed that “investors should not expect continuous and ultra-high growth” going forward taking into account the company’s “current scale.”
Separately, the sell-side analysts expect Pinduoduo’s EBIT margin to improve from 12.4% in FY 2021 to 14.6% in FY 2022 as per S&P Capital IQ data. The expected profit margin expansion should be supported by positive operating leverage effects and lower sales & marketing expenses in line with more modest revenue and user growth.
In the subsequent section, I focus my attention on two key factors which will have a big impact on the company’s long-term prospects.
What Is PDD’s Long-Term Outlook?
In assessing PDD’s long-term outlook, there are two key things to consider.
One is the company’s planned investments in agriculture.
In my article for Pinduoduo published in late-November last year, I referred to PDD’s August 24, 2021 media release, which revealed a “new 10-billion-yuan initiative with profits to support agricultural modernization and rural vitalization” which implies that “any potential profits in future quarters would be allocated to the initiative” until the full RMB10 billion is committed.
I have a mixed view on PDD’s focus on the agriculture space.
On the positive side of things, this opens up significant growth opportunities for PDD in the long run. Pinduoduo noted at its Q4 2021 investor call that “the online penetration rate for agriculture (products vis-a-vis other product categories) is still very low” and emphasized that its current investments in agriculture digitalization in China will support the “company’s mid to long-term development outlook.”
On the negative side of things, PDD disclosed at the company’s fourth-quarter earnings briefing that it has continued “to implement the zero commission policy on agriculture products” in recent quarters, which “would affect our take rates.”
In other words, there is sufficient uncertainty over the time needed for Pinduoduo to grow its agriculture products business segment to a sufficient scale and engage in meaningful monetization. In the short term, the company’s agriculture investments could put a cap on its profit margin expansion potential.
The other key factor is Pinduoduo’s listing status in the US.
As a Chinese company listed in the US, PDD is at risk of being delisted. A September 14, 2021 Seeking Alpha News article mentioned that “U.S.-listed Chinese companies” could be restricted “from trading on American markets in 2024 if they fail to abide by rules requiring firms to use approved auditors for three straight years.”
As it stands now, Pinduoduo has yet to disclose any plans for a secondary listing on another stock exchange. Even if PDD does do a secondary listing in Hong Kong or other markets, it will still be negative for the company if it is unable to remain listed in the US. The US remains the most liquid financial market in the world, so assuming that Pinduoduo is unable to continue being listed in the US, its valuations might further de-rate and its future financing options will be constrained as well.
Is Pinduoduo Stock At A Fair Valuation?
Pinduoduo is at a fair valuation now, as the negatives or headwinds I noted in this article have been factored into its share price to a considerable extent.
PDD’s current valuations are inexpensive on an absolute and relative (historical) basis. Pinduoduo’s current consensus forward next twelve months’ Enterprise Value-to-Revenue multiple of 2.4 times represents a big discount to its three-year mean forward Enterprise Value-to-Revenue multiple of 8.1 times, according to S&P Capital IQ. As highlighted earlier, Pinduoduo is still expected to grow its headline revenue by a decent (albeit slower) +18.8% in the current year as compared with its low single-digit Enterprise Value-to-Revenue multiple.
Is PDD Stock A Buy, Sell, or Hold?
PDD stock is still a Hold in my view. As explained earlier, investors should not focus solely on the company’s EPS beat, but need to consider other metrics as well. Pinduoduo’s revenue and user growth has moderated significantly, but this is largely priced in which justifies that PDD is assigned a Hold rating.
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