In 2022-2023, Pinduoduo has surged an impressive 151%, with its share price once recovering to almost two-thirds of its peak. This rally shines in contrast to the wider slump in Chinese tech stocks, with giants like Alibaba and JD.com falling to just a quarter of their historic highs, dropping 34% and 57%, respectively.

While some stocks soared, others plummeted. By the end of November 2023, Pinduoduo's market value surpassed Alibaba's, making it the largest e-commerce platform in China. However, following the release of its second-quarter earnings report, Pinduoduo's stock price fell sharply, leading to a significant decline in market value and putting it behind Alibaba once again.

Despite low consumer confidence and intense competition in the e-commerce sector, Pinduoduo has surged ahead. Can it regain its lead? We'll need to keep an eye on its financial reports to see.

Pinduoduo will release its latest earnings results on November 21. Each earnings release may signal a potential investment opportunity, but before diving in, investors need to understand how to interpret their financial statements.

For Pinduoduo's financial reports, we may focus on three key areas: changes in growth rate, shifts in profitability, and how actual performance compares to expectations.

1. Growth rate

To evaluate Pinduoduo's performance, we should consider two aspects of its growth rate: the company's own trends and a comparison with its e-commerce peers.

Pinduoduo's countercurrent rise is most evident in its rapid revenue growth. From Q1 2022 to Q1 2024, Pinduoduo's revenue growth accelerated, with Q1 FY2024 showing an over 130% year-over-year(YoY) increase and a 90% YoY rise in the latest quarter. This swift growth may have been a key driver behind the significant rise in its stock price previously.

Two main factors fueled Pinduoduo's revenue engine. Initially, Pinduoduo became a major beneficiary amid economic uncertainty as its low-price strategy resonated with consumer demand of cuting back on costs. Later, the explosive international expansion through Temu propelled another crucial surge in revenue.

How does Pinduoduo stack up against its e-commerce competitors, primarily Alibaba and JD.com? Let’s compare the revenue growth rates and the sales expense ratio among these three giants.

Starting with revenue growth, a faster rate may suggest a more competitive edge. Since Q2 2022, Pinduoduo's revenue growth has consistently outshone Alibaba and JD.com, which showed only single-digit growth. Pinduoduo has not only maintained but accelerated its growth each quarter, grabbing a larger slice of the market in the process.

The sales expense ratio may be a key indicator of competitiveness. An increasing trend can indicate a disadvantage. Conversely, a declining ratio might suggest higher competitiveness.

For Pinduoduo, this figure has been improving. Despite the expected ups and downs from big sale events like 618 and Double 11, Pinduoduo's sales expense ratio has been trending down, from 47.2% in the first quarter of 2022 to 26.8% by the second quarter of 2024. On the other hand, Alibaba's sales expense ratio ranged between 10% and 14%, while JD's remained stable.

When it comes to future performance, it may be challenging to expect Pinduoduo to maintain nearly doubled growth rates, and even a stable growth rate of over 30% might be difficult to achieve. Given the potential pressure from increased tariffs, the explosive growth of Temu's international business will require further observation.

The critical questions are: Can Pinduoduo keep outpacing its rivals in revenue growth, and can it sustain or further improve its sales expense ratio? The answers to these questions will tell us a lot about the company's ability to keep its lead in the competitive e-commerce space.

2. The change in profitability

The second important point to note from Pinduoduo's financial report may be the change in profitability, specifically the gross margin and net margin.

Pinduoduo's gross margin initially rose and then fell from the first quarter of 2022, peaking mainly due to the scale effect of rapid revenue growth. However, since the third quarter of 2022, the gross margin has been declining each quarter, dropping a total of 18 percentage points from 79.1% to 60.5%.

This decrease isn't due to diminishing profitability in domestic operations but largely because of significant investments and user subsidies in the newly promoted Temu international business and the recent Pinduoduo Grocery venture during their rapid expansion phases.

While Pinduoduo hasn't disclosed revenue and profit performance by individual business segments, it's likely that the gross margin for these new ventures is negative in the early stages, contributing to the overall decline in gross margin.

Despite this, Pinduoduo's overall gross profit has significantly increased. The decline in gross margin has also been narrowing. In the four quarters of 2023, the declines were 7.1, 6.2, 3.2, and 0.5 percentage points, respectively. By Q2 2024, the gross margin reached 65.3%, showing signs of stabilization and recovery. This suggests that the potential losses from Temu and Duoduo Grocery might be improving or even turning profitable.

In terms of net margin, while Pinduoduo has once seen an increase in absolute net income levels, the margin has decreased overall, mainly due to the significant drop in gross margin. However, the decrease in net margin is much less than that in gross margin, thanks to effective cost control in operating expenses.

By Q4 2023, Pinduoduo's net margin rose to about 26.2%, improving both year-over-year and quarter-over-quarter. By Q2 2024, Pinduoduo's net margin further increased to 33%, setting a new record high.

Pinduoduo has reduced its sales expense ratio from 39.6% in Q3 2022 to 26.8% in Q2 2024, R&D expenses from 7.6% to 3%, and SG&A expenses from 2.6% to 1.9%. The overall operating expense ratio decreased from 49.7% to 31.7%, mitigating the impact of the gross margin decline on net margin.

This improved operational efficiency is a key competitive advantage in the cutthroat e-commerce industry. Moving forward, monitoring Pinduoduo's operating expense ratio and its subsequent effect on net margin will be crucial to gauge the company's sustained competitive advantage.

3. Actual Performance vs. Performance Expectations

Pinduoduo discloses its revenue in a consolidated manner without breaking it down by business segment. Additionally, the company's management rarely shares operational data with the public ahead of financial reports. Thus, Pinduoduo's earnings can be quite unpredictable, and actual performance may significantly differ from Wall Street analysts' expectations, leading to substantial stock price volatility post-earnings release.

On moomoo, we can see a comparison of Pinduoduo's forecasted and actual performance. Previously, the company had exceeded expectations five consecutive times, leading to significant short-term stock price increases after each earnings release.

However, in Q2 2024, Pinduoduo's revenue fell below expectations for the first time. Additionally, management indicated during the earnings call that future revenue growth would face challenges and that they would continue to increase investments at the expense of short-term profits. This stark contrast to the market's high expectations resulted in a sharp decline in the stock price following the earnings announcement.

Given Pinduoduo's poor performance in the second quarter, its upcoming earnings results have become particularly important. For example, analysts currently forecast Pinduoduo's revenue for Q3 2024 to be 103.699 billion yuan, as shown on moomoo. If the actual results exceed this expectation, it could positively impact the stock price in the short term. Conversely, if the actual performance falls short, it may lead to negative sentiment in the market.

Having read this far, you may now have a deeper understanding of how to interpret Pinduoduo's financial reports. It's noteworthy that the release of earnings reports from prominent companies may present unique trading opportunities for different types of investors.

For instance, if an investor, after analyzing past reports and considering recent developments, believes a company's latest earnings will send positive signals and boost the short-term stock price, they might consider taking a long position. This could involve buying the underlying stock or purchasing call options.

Conversely, if the investor expects the earnings to be unfavorable and potentially pressure the stock price, they might consider taking a short position, either through short selling or buying put options.

If the report's outcome is unclear but volatility is expected, they might use a straddle strategy, buying both calls and puts.

However, investors should carefully assess their risk tolerance, particularly when considering high-risk trades like short selling or options, before making any trading decisions.

In summary:

In terms of growth, Pinduoduo's revenue has significantly outpaced its peers, and its sales expense ratio is declining, indicating strengthening competitiveness. We should observe whether the company can continue this trend.

Pinduoduo's gross margin initially dropped due to costly ventures like Temu but has since stabilized and rebounded. Improved operating expense ratios have driven the net margin to a record high. Going forward, we may monitor the gross margin rebound and the company's ability to maintain high operational efficiency to sustain this elevated net margin.

With respect to performance projections, since Pinduoduo tends to have a high degree of earnings variability, it's important to compare actual financial performance with the expected benchmarks. A significant outperformance of the projections could provide a boost to the stock price.

Each earnings report may present new investment opportunities, so investors should align their strategies with their risk capacity.