Star company earnings season Raiders
[May 2024] The king of online shopping! How to evaluate the performance of pdd holdings?
In the two-year period of 2022-2023, pdd holdings rose by 40% and 79% respectively, with a cumulative increase of 151% over two years, and its stock price once returned to nearly 2/3 of its highest point. In the overall decline of Chinese concept stocks, this performance can be said to be extremely rare. As a comparison, during the same period, Alibaba's stocks fell by 34%, leaving only a quarter of their highest point in stock price, while JD.com fell by 57%, with a stock price only slightly above a quarter of its peak.
One side is a substantial rise, while the other is a severe decline. Under such a diametrically opposite situation, at the end of November 2023, pdd holdings' market capitalization also surpassed Alibaba, becoming the domestic e-commerce platform with the largest market cap. In the following months, the market cap of the two companies alternated, no longer the situation of one leading the other.
In the environment of low consumer confidence and the extremely turbulent e-commerce industry, pdd holdings has achieved a come-from-behind victory. So, can pdd holdings maintain its leading advantage? We can grasp three key points by looking at its performance: changes in performance growth rate, changes in profitability, and comparison between actual performance and expected performance.
1. Changes in Performance Growth Rate
For pdd holdings' performance growth rate, we can look at it from two points, including its own performance growth rate changes and comparison with its e-commerce counterparts.
The most intuitive aspect of pdd holdings' counter-trend rise is reflected in the high-speed growth of its revenue. From Q1 2022 to Q4 2023, pdd holdings' revenue growth rate was mostly accelerating and reached more than double YoY in the latest Q4 of 2023. Rapid performance growth is also an important driver behind its substantial stock price increase.
There are two main engines driving pdd holdings' revenue growth. In the early stages, in the context of low economic confidence, people's consumption showed a tendency to downgrade, and the low-pricing pdd holdings just complied with this trend and thus became the biggest beneficiary. In the later stage, with the launch of Temu, pdd holdings' international business grew rapidly, becoming another important growth driver for revenue.
So how does pdd holdings compare with its e-commerce counterparts? Mainly with Alibaba and JD.com. We can compare the revenue growth rate and sales expense ratio of these three e-commerce companies.
First, let's compare the revenue growth rate of the three companies. The faster the revenue growth rate, the more advantageous the company is in the competition. We can see that from Q2 2022, when pdd holdings' stock price started to rise, the revenue growth rate of pdd holdings each quarter was significantly higher than that of Alibaba and JD.com. And in 2023, when Alibaba and JD.com only maintained single-digit growth overall, pdd holdings took this opportunity to grab more industry cake and continuously accelerate its growth in each quarter.
Next, let's compare the sales expense ratio of the three companies. If this ratio tends to rise, the company may be at a disadvantage in competition. If it stays down, the company may have an optimal competition position.
We can see that since Q1 2022, although pdd holdings' sales expense ratio has fluctuated seasonally due to activities such as 618 and Double Eleven, the overall trend is downward, dropping from 47.2% in Q1 2022 to 30% in Q4 2023. Alibaba's sales expense ratio fluctuates around 10%-13% overall, while JD.com's sales expense ratio is relatively stable, slightly decreasing.
Regarding future performance, we may not expect pdd holdings to continue to maintain a doubling growth rate, and steady growth rates of more than 30% might be difficult to achieve. After all, the explosive growth of Temu's international business still needs to be observed further.
What we need to pay more attention to is how long pdd holdings' revenue growth rate can continue to significantly surpass that of its peers, and whether its sales expense ratio can maintain a stable or downward trend, to determine whether pdd holdings can continue to maintain its relative competitiveness with its peers.
2. Changes in Profitability
Regarding pdd holdings' performance, the second key point to focus on is changes in profitability, mainly including gross margin and net profit margin.
Looking at the gross margin, pdd holdings' gross margin level has shown a trend of first rising and then falling since Q1 2022. The earlier rise was largely due to scale economy brought by the rapid expansion of revenue. However, since Q3 2022, pdd holdings' gross margin has been decreasing each quarter, dropping by 18 percentage points from 79.1% to 60.5%.
The reason for the decline in Pinduoduo's gross margin is not that the domestic business is no longer profitable. The main reason is the strong promotion of Temu's international business that began in the fourth quarter of 2022, as well as the large amount of subsidies needed to expand the Duoduomai Cai business in the early stages. As for the performance of Pinduoduo's various business sectors, revenue and profit are not disclosed separately. However, from the perspective of business rules, the gross margin of this business is most likely negative and is in the early stage of increasing revenue without increasing profits, thereby lowering the overall gross margin performance.
However, in terms of gross margin, there are still two angles worth paying attention to in Pinduoduo. First is the overall change in gross margin. We can see that during the process of declining gross margin, Pinduoduo's gross profit level still increased. In 2023Q4, gross profit was 53.8 billion, a year-on-year increase of 74.2%. At the same time, we can also see the marginal improvement in the degree of decline in gross margin. We can see that in the four quarters of 2023, the degree of decline in Pinduoduo's gross margin was 7.1, 6.2, 3.2, and 0.5 percentage points respectively, and the overall decline was narrowing. If the decline continues to narrow or even begin to rebound, it may mean that the potential loss situation of Temu or Duoduomai Cai business is improving, or even turning losses into profits.
Looking at the net profit margin, Pinduoduo also showed an increase in net profit level, but the overall net profit margin declined. The main reason for the decline in Pinduoduo's net profit margin is naturally the significant decline in gross margin. However, we can also see that the degree of decline in Pinduoduo's net profit margin is far lower than the decline in gross margin. By 2023Q4, Pinduoduo's net profit margin reached about 26.2%, and there was a rebound in both year-on-year and quarter-on-quarter periods. This is mainly due to Pinduoduo's control over operating expenses. Pinduoduo's sales expense ratio decreased from 39.6% in 2022Q3 to 30% in 2023Q4, research and development expense ratio decreased from 7.6% to 3.2%, and management expense ratio decreased from 2.6% to 2.1%. The overall operating expense ratio decreased from 49.7% to 35.3%, partially offsetting the impact of the decline in gross margin on net profit margin.
The decrease in operating expense ratio largely reflects Pinduoduo's continuous improvement in operating efficiency, which is an important competitive advantage in the current intensifying e-commerce industry. We can continue to pay attention to Pinduoduo's operating expense ratio and its impact on net profit margin.
Due to the fact that Pinduoduo's revenue is not broken down into various business sectors, and the management rarely synchronizes operating data with the outside world before the release of earnings, Pinduoduo's earnings flexibility may be very large. The actual earnings released may have a significant deviation from Wall Street analysts' earnings expectations, which may cause a significant volatility in Pinduoduo's stock price after the earnings release.
On the RichPlay app, we can see the comparison between Pinduoduo's expected earnings and actual earnings. Using the past four quarters as an example, Pinduoduo has exceeded expectations for four consecutive times, and its stock price has also risen sharply each time after earnings release. With these achievements behind it, the market's performance may be even more optimistic about Pinduoduo's new earnings performance.
Taking revenue as an example, the RichPlay app shows that analysts' forecast for Pinduoduo's Q1 revenue in 2024 is 76.56 billion. If the actual earnings significantly exceed this expectation, it may bring about a greater advantage in the short-term stock price. Conversely, if actual earnings are lower than expected, it will be a short-term negative. If Pinduoduo's earnings happen to meet expectations, it may also be a certain degree of negative, because Pinduoduo has exceeded expectations for four consecutive times. Only outstanding performance may further boost the stock price.
3. Comparison of actual performance with expected performance
Many star companies may represent rare trading opportunities for different types of investors every time they release earnings.
However, as for Pinduoduo's earnings, as the revenue is disclosed in a consolidated manner and there is little disclosure of operating data by the management, every release of actual earnings may deviate from Wall Street analysts' performance expectations and cause significant volatility in Pinduoduo's stock price.
How to read Pinduoduo's earnings may be a little clearer to you now. It is worth mentioning that every release of earnings for many star companies may represent rare trading opportunities for different types of investors.
What if pdd holdings' performance just meets expectations? It may still be bearish to a certain extent, because pdd holdings has exceeded expectations four times in a row. To further boost the stock price, just passing may not be enough, it may need to be excellent.
After reading this, you may have some new understanding of how to read Pinduoduo's earnings. It is worth mentioning that many star companies release earnings, which may represent a rare trading opportunity for different types of investors.
For example, if an investor reads the past performance and combines the latest developments to feel that the latest performance of a company will release some positive signals and benefit the short-term stock price, investors may consider going long. The way to go long can be to consider buying the main stock or buying call options, etc.
On the other hand, if an investor thinks that the latest performance of a certain company will not be optimistic and will put pressure on the short-term stock price, the investor may consider going short. The way to go short can be to consider short selling margin securities or buying put options, etc.
Of course, if an investor thinks that the long and short direction of a company's performance is not clear, but the stock price may have a large fluctuation up or down after the performance is announced, then the investor may consider going long the volatility of its stock price and consider using the straddle strategy of buying both call and put options to seize potential opportunities.
In summary:
In terms of performance growth, PDD Holdings' revenue growth rate exceeds that of its peers by a large margin, and the sales expense ratio tends to decline, indicating that the company's competitiveness in the industry continues to strengthen. Subsequently, we can observe whether the company can continue this trend.
In terms of profitability, PDD Holdings' gross margin has dropped significantly due to business burn such as Temu, while the operating expense ratio has improved significantly, and the net profit margin has only slightly decreased. Subsequently, we can pay attention to the marginal improvement of the company's gross margin and whether it can maintain higher operating efficiency, thereby improving the net profit margin.
In terms of performance expectations, PDD Holdings has greater flexibility in performance. We can pay attention to the comparison between actual performance and expected performance. If it exceeds expectations by a large margin, it may have a positive impact on the stock price.
Each time the company releases its performance, it may bring potential trading opportunities. Investors can consider suitable trading varieties based on their personal risk tolerance.
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