Why Pinduoduo Stock Lost 12% Last Month

What happened

Shares of Pinduoduo (NASDAQ: PDD) were in the red last month after the Chinese social e-commerce company posted a disappointing third-quarter earnings report. As a result, the stock finished the month down 12%, according to data from S&P Global Market Intelligence.

As the chart below shows, the stock plunged after the earnings report came out on Nov. 20, but recovered some of those losses on news of a partnership with Amazon.com.

PDD data by YCharts.

So what

Pinduoduo, which employs a Groupon-like model that allows shoppers to get more discounts as more of their friends join on a purchase, continued to post skyrocketing growth in the quarter. Revenue jumped 123% to $1.05 billion, which was slightly ahead of estimates, and gross merchandise volume (GMV) was up 144% to $117.5 billion. Growth came from both new users and an increase in spending per user as average monthly active users rose 85% to 429.6 million and average spending per user was up 75% to $219.20.

Image source: Getty Images.

However, the company spent aggressively to achieve that growth as cost of revenue, which includes cloud and support services, rose 137%, and other operating expenses were up 119%. As a result, the adjusted operating loss expanded 169% to $297.1 million. On a per-share basis, its net loss widened from $0.09 to $0.20, which was significantly worse than analyst expectations for a loss of $0.07.

CEO Zheng Huang explained the widening loss, saying, “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.”

Just a couple of days later, the stock bounced back after Amazon opened a pop-up shop on Pinduoduo, selling about 1,000 products. Investors are hopeful that the partnership will pave the way to a further alliance.

Now what

Pinduoduo did not offer guidance in its report, but it’s hard to discount a company that has gone from $0 sales to more than $100 billion in quarterly GMV in just four years. The social commerce model is clearly resonating with Chinese shoppers, and management seems justified in making expensive investments in the platform considering that growth is doubling. The company will eventually have to take steps toward profitability, but expect the Chinese stock to be volatile in the meantime given the fluidity in the U.S.-China trade situation as well.

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