The up-and-coming Chinese e-commerce company Pinduoduo Inc (NASDAQ: PDD) has caught investors' attention recently. It delivered a solid financial performance in the last few quarters, and its cross-border e-commerce marketplace Temu has captured the mindshare of millions of overseas consumers.
Pinduoduo's stock price is up by more than 50% in the last 12 months and investors are optimistic that the momentum could continue in 2024. Still, there are always risks when investing in any company. Here are two critical aspects that investors should be aware of before rushing to buy this stock.
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1. Management has a track record of being extremely low profile
Pinduoduo is one of the least-known success stories of the last decade. Founded in 2015, the young e-commerce company already made $1.9 billion by 2018. In 2023, revenue reached $34.9 billion, and net income hit $8.5 billion -- a remarkable growth track record with solid profitability.
Despite its achievements, Pinduoduo didn't gain commensurate attention from investors, thanks to its track record of keeping a low profile. The management team has generally kept its communication at a minimum, especially about aspects that will affect its competitiveness. Even when pushed by analysts, the management team would typically give a general answer to detailed questions during its earnings calls.
While it's not unusual for companies to remain secretive about their strategies and plans -- ask Apple about that -- it does create problems for investors. The lack of information makes it extremely difficult for investors to make predictions about the company. Even those willing to go the extra mile to learn about the company have to rely on informal channels, such as talking to merchants and employees, which presents another layer of difficulty due to geographical, language, and cultural barriers.
Pinduoduo's tight-lip policy has also drawn the attention of other stakeholders. For instance, the Financial Times has raised concerns about the lack of information on various aspects of the company, including business model, financial reporting and disclosure, etc. If left unanswered, these questions could negatively impact the company's reputation. The negative image, in turn, could affect investors' sentiments and the company's stock price.
So far, Pinduoduo's response was simple and effective -- executing well and delivering results that exceeded investors' expectations. However, the real test will come for investors if the company fails to outperform Wall Street's targets.
2. Temu's future remains uncertain
One of the main factors that has caught investors' attention lately is Pinduoduo's cross-border e-commerce marketplace Temu. Launched in the United States in September 2022, Temu has expanded into nearly 50 markets, reached 250 million downloads globally, and achieved 100 million active users in the United States in 2023.
According to Reuters, Temu accounted for 17% of the U.S. discount-stores category market share. Suffice it to say, the company has executed its growth strategy well so far.
Still, there are plenty of uncertainties ahead for the young company. For one, it must improve its marketplace in many aspects, including quality control, delivery time, counterfeit items, etc., to compete effectively against incumbents like Amazon in the long run. And since many have tried (and failed) cross-border e-commerce (the recent example being Wish), Temu has a rough path ahead.
Besides, the dire geopolitical relationship between the U.S. and China could present another roadblock to Pinduoduo's global expansion. For example, if passed, the recently proposed bill to ban TikTok in the U.S. could become a precedent for what could happen to other Chinese companies operating in this country.
The silver lining here is that the U.S. is just one of dozens of Temu's markets, albeit a rather large one. Still, there's no guarantee that other countries won't follow the U.S. when dealing with Chinese companies, so the geopolitical risk is unavoidable.
What this means for investors
Pinduoduo has been an outlier lately by delivering solid stock returns, while its Chinese peers have generally faced challenging stock performance. Still, investors should consider the other side of the coin before rushing to buy the stock.
It will take a strong gut to withstand the potential volatility due to the abovementioned risks. In other words, owning the stock might be fruitful in the long run, but it's not for everyone.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lawrence Nga has positions in PDD Holdings. The Motley Fool has positions in and recommends Amazon and Apple. The Motley Fool has a disclosure policy.
