Uncertain Outlook Makes PDD Stock a Sell
Chinese e-commerce platform shares Pinduo-duo (NASDAQ:PDD) have struggled since early last year, when they topped $200. Today, PDD shares are trading in the $40 range.
Recent growth measures have not been impressive. And it is difficult to determine whether the company’s ongoing strategy changes will ultimately be successful. In addition, the company faces multiple regulatory risks.
In light of these challenges, I recommend that investors sell PDD stocks.
Pinduoduo shows weak growth figures
Pinduoduo announced fourth quarter and full year results March 21th. While some aspects of the company’s growth were strong, its overall revenue increase last quarter was anemic.
In the fourth quarter, revenue grew only 3% year-on-year to 27.2 billion Chinese yuan, below estimates. And average monthly users grew just 2% from a year ago to 733.4 million.
“Our revenue growth has slowed due to moderating user growth and fluctuating user activity,” said Jun LiuPinduoduo’s vice president of finance, in a statement accompanying the results.
On a more positive note, the company reported a 108% year-over-year increase in “transaction services revenue” for the fourth quarter, as well as a 33% increase in annual spend per active buyer. for 2021.
Net profit also improved, with Pinduoduo recording 6.6 billion yuan from a loss in the fourth quarter of 2021. However, the company attributed this in part to cost reductions and “a one-time discount from one of our service providers”.
This leads me to believe that the company’s profitability may have peaked. By definition, a “one-time” discount is unlikely to reoccur. And there is no guarantee that the company will be able to further reduce costs. Even if it did, it could have significant negative implications for Pinduoduo in the future.
Pinduoduo’s change in strategy is difficult to assess
Pinduoduo appears to be largely abandoning its merchandise sales business, as revenue in this category fell 98% year-on-year in the fourth quarter to just 81.7 million yuan. Instead, the company is turning to agriculture, as it seeks to “deepen [its] digital inclusion efforts in agriculture,” says CEO Lei Chen.
I must admit that I know very little about agriculture. But I think a lot of people may have a hard time understanding the phrase “digital inclusion efforts in agriculture.”
Does Pinduoduo use technology to enable farmers to get their crops to market faster or more efficiently find the most lucrative buyers for their produce? Does it focus on introducing and/or selling more advanced agricultural machinery?
Beyond saying that Pinduoduo was looking to sell more agricultural products with “zero commission”, using various methods to promote and market agricultural products in China and “advocating the adoption of agricultural technology,” Chen was not very specific during the company’s fourth quarter earnings conference call about what the new strategy involves. He also didn’t explain why the company thinks its new approach will be successful. And he certainly didn’t provide any stats showing how successful the strategy has been so far.
It seems that Pinduoduo is trying to ingratiate itself with Chinese farmers in order to become the first online seller of agricultural products in China. But the company’s “zero commission” policy makes it seem like the initiative isn’t making much money yet, if at all. And it is difficult to determine the extent to which Chinese consumers want to buy agricultural products online.
In the United States, grocery stores sell their products online, but I have never heard of an e-commerce company focusing on selling agricultural products online. So, I don’t know if Pinduoduo’s strategy will work.
Regulatory threats remain
As I’ve noted in columns since November 2020, Beijing has hit many Chinese consumer-facing companies with severe penalties. Although the Chinese government indicated last month that its the tech crackdown is overI wouldn’t be surprised if the Chinese government resumed its attacks on big tech companies sooner rather than later.
Meanwhile, the US Public Company Accounting Oversight Board (PCAOB) recently stated it may not be able to easily reach an agreement with the Chinese authorities on the audit of Chinese companies whose shares are traded in the United States
As Reuters reported“In December, the U.S. Securities Exchange Commission (SEC) finalized rules for delisting Chinese companies under the Holding Foreign Companies Accountable Act (HFCAA), and said it had identified 273 risky companies, without naming them. .”
Pinduoduo is believed to be one such company. This is why the PDD stock jumped last week after it was reported that Beijing had “empowered” its regulators “to find a mechanism to comply with foreign accounting regulations.”
However, additional audits and write-offs remain major risks to the PDD stock.
PDD stock essentials
Pinduoduo’s overall growth is slow and it’s unclear whether its new strategy will work. In addition, the company faces a difficult regulatory environment. For these reasons, I recommend that investors sell PDD shares.
As of the date of publication, Larry Ramer had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.
Larry Ramer has researched and written about US stocks for 13 years. He was employed by The Fly and Israel’s largest business newspaper, Globes. Larry started writing columns for InvestorPlace in 2015. Some of his highly successful contrarian picks include GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer.