Pinduoduo (NASDAQ:PDD) Stock a Buy: A Strong Chinese E-commerce Alternative

When you think of Chinese e-commerce companies, it’s quite likely that the first one that comes to mind is Alibaba (NYSE:BABA). However, investors need to understand that there’s room for more than one successful e-commerce business in one of the world’s largest economies. The market size of the e-commerce industry in China is growing at a rapid pace and McKinsey reported that online retail sales in the country eclipsed $1.5 trillion in 2019. This trend could lead to multiple winners over the long term as newer companies find their footing in the most dynamic retail market in the world.

We’ve seen a lot of bullish price action in Chinese stocks lately, including one e-commerce company that stands out. Pinduoduo (NASDAQ:PDD) is the leading social e-commerce platform in China and the stock has performed extremely well since its IPO back in 2018. There are several reasons why investors should be thinking about adding shares at this time. The stock has recently broken out to new all-time highs and could be in for more upside going forward. Here’s a deeper look at the company’s business model and why it might be a strong long-term investment going forward.

The Second Largest E-commerce Company in China

The growth story behind Pinduoduo is nothing short of impressive. The company was founded back in 2015 and has grown into a $135 billion market capitalization e-commerce powerhouse in a short time span. Part of what makes Pinduoduo unique is its differentiated business model. The company uses a “team purchase” model on its platform that promotes interactions among its 568 million+ monthly active users. Pinduoduo is built to resemble a virtual bazaar that makes shopping fun for users. Shoppers connect on social networks to share product information and shopping experiences that ultimately result in lower prices for buyers. This model keeps shoppers engaged and incentivizes Pinduoduo users to invite their friends, family, and social contacts to the platform.

The team purchase model is working for the company, as sales have grown over 300% annually over the past three years. Shoppers can find almost anything on the platform including apparel, food and beverage, fresh produce, electronics, furniture, household goods, auto accessories, and more. Thanks to the social aspect of the platform, the company can reduce prices for consumers while creating larger orders that allow it to take advantage of economies of scale.

Growth in All the Right Places

There’s a lot to like about the company’s earnings from Q2 that were released back in August. Pinduoduo saw Gross Merchandise Volume in the twelve months ended June 30^th come in at $179.6 billion, which was a year-over-year increase of 79%. Gross merchandise volume is potentially the most important metric for e-commerce companies because their revenue is derived from the merchandise sold and the fees that users are charged. Speaking of revenue, the company also saw a 67% year-over-year increase in Q2 revenue which totaled $1.7 billion.

Another impressive metric that investors should consider is the number of average monthly active users and active buyers that the platform is seeing. The company reported 568.8 million average active monthly users in Q2 which was a year-over-year increase of 55%. Active buyers also increased by 41% year-over-year in Q2 683.2 million. These figures are impressive for a company operating in a competitive market environment. It’s worth noting that the company reported an operating loss of $232.1 million in Q2 as it continues to ramp up its sales, marketing, and research and development spending. However, that shouldn’t scare investors off, as the company has a good chance of achieving profitability in 2021.

Several Catalysts to Consider

Pinduoduo stock has been one of the best performing Chinese stocks this year and is up over 20% in November alone. Several catalysts could be causing the stock to break out to new highs. First, most Chinese stocks have been performing well thanks to the prospect of a democratic presidency. You also have recent analyst upgrades including Goldman Sachs raising its price target for Pinduoduo to $123 per share. With major rival Alibaba facing selling pressure related to the news that Ant Group is suspending its planned IPO, there’s a chance that money is flowing to competing stocks like Pinduoduo.

Finally, Pinduoduo will report its Q3 earnings on November 12^th. This could be another strong quarter for the company in terms of gross merchandise volume, top-line growth, and user metrics. These catalysts could continue driving the share price higher as more and more investors catch on to the fact that Pinduoduo is the fastest-growing e-commerce platform in China.

Final Thoughts

There’s a lot to like about Pinduoduo since it operates in one of the biggest retail markets in the world and is benefitting from the accelerated adoption of e-commerce. Some investors might be concerned about tensions between the U.S. and China, the fact that Pinduoduo is still unprofitable, and competition from other companies in the country. With that said, Pinduoduo is a great option if you are interested in diversifying your portfolio with international exposure in an industry that should continue to see massive growth for many years to come.