Updated on May 18th, 2022 by Aristofanis Papadatos
Pinduoduo (PDD) operates an e-commerce platform in China. This platform offers a wide range of consumer products, such as apparel, shoes, bags, childcare products, food and beverage, agricultural products and electronic appliances.
Pinduoduo benefits from the strong growth of the Chinese economy, whose GDP has grown more than 6% per year for more than a decade. The company also benefits from a secular trend, namely the shift of consumers from conventional shopping to online shopping.
Pinduoduo has gone through a roller-coaster since its IPO, in mid-2018, at a price of $19. The stock rallied more than 10-fold in less than two years, from $19 to a peak of $203 in early 2021 but it has plunged to $40 due to its sky-high peak valuation, the surge of inflation and fears that some Chinese stocks may be delisted from NYSE in the future.
Despite its 66% plunge in the last 12 months, Pinduoduo remains a large-cap stock with a market cap of $48 billion.
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Income investors may have missed the exceptional returns of Pinduoduo, as the company does not pay a dividend. This is fairly common among growth stocks, particularly those in the technology sector.
Income investors who are attracted by the exciting growth potential of Pinduoduo probably wonder whether the company will pay a dividend anytime soon.
Business Overview
Pinduoduo operates a mobile e-commerce platform in China, with a wide range of products. This platform has become a mainstream online shopping application.
Pinduoduo benefits from the secular shift of consumers from brick-and-mortar shopping to online shopping. This trend has accelerated since the onset of the coronavirus crisis, in 2020. It is also worth noting that Pinduoduo has become the largest online platform for agricultural products in China by enabling direct selling from farms to the dining table.
Thanks to its impressive growth, Pinduoduo has attracted 868.7 million active buyers in the last 12 months, after just a few years of operation.
Source: Investor Presentation
Pinduoduo also has 733.4 million monthly active users and is still growing its customer base at a tremendous pace.
In 2021, the gross merchandise volume of the mobile platform of Pinduoduo grew 46% over the prior year. As shown in the chart below, the growth of the gross merchandise volume is both impressive and consistent.
Source: Investor Presentation
The consistency is paramount, as it is a testament to the strength of the business model of Pinduoduo and the absence of any signs of fatigue.
The impressive growth in the gross merchandise volume has been achieved thanks to high growth in the number of monthly active users and a steep increase in the annual spending per active buyer.
Source: Investor Presentation
The rising revenue per active customer indicates that the platform of Pinduoduo achieves strong customer engagement which leads consumers to use the platform more and more often. This is also evident from the first slide, which shows that 84% of the annual active users of the platform have made at least one purchase during the last month.
Growth Prospects
Pinduoduo is growing its revenues at a breathtaking pace and still has ample growth potential, as the secular shift of consumers from traditional shopping to online shopping is in its early stages. The company will also grow thanks to the continuous addition of new products into its platform. It will also continue to benefit from the strong growth of the Chinese economy, which results in increased consumption power of its individuals.
In 2021, online sales in China grew 15% over the prior year, to an eye-opening all-time high of $2.49 trillion. As the annual gross merchandise value of Pinduoduo is approximately $360 billion, it is evident that the company has ample room to keep growing its revenues.
It is also remarkable that China managed to contain the pandemic more efficiently than nearly all the other countries in the world thanks to its drastic measures and the strict compliance to these measures. The country has incurred a setback lately due to a surge in daily new infections but this headwind is likely to prove immaterial from a long-term point of view.
Overall, Pinduoduo is still in the early phases of its growth trajectory and has exciting growth prospects ahead. Analysts agree on this view, as they expect Pinduoduo to nearly triple its earnings per share in just three years, from $1.70 this year to $4.91 in 2025.
Competitive Advantages
Technology companies rarely enjoy a strong competitive advantage, as it is usually inexpensive to imitate their business model. In addition, there is usually cut-throat competition in the tech sector and hence many companies run the risk of incurring business deterioration if their competitors achieve major technological breakthroughs.
On the other hand, Pinduoduo has a significant competitive advantage, namely its great scale, which has resulted from the popularity of its e-commerce platform. Its attractive, user-friendly platform, which has attracted hundreds of millions of users, is likely to keep most of these users engaged for years, as consumers are much more likely to keep using a familiar platform than switch to a new one.
Will Pinduoduo Ever Pay A Dividend?
In order to pay a dividend, companies need to generate positive free cash flows. In other words, their business should generate cash flows that exceed the capital expenses by a wide margin. Some popular tech stocks cannot pay dividends to their shareholders due to their negative free cash flows.
For instance, Uber (UBER), Lyft (LYFT) and Nikola (NKLA) have not managed to generate positive free cash flows yet.
Pinduoduo spends a great portion of its revenues on sales and marketing expenses.
Source: Investor Presentation
As shown in the above chart, Pinduoduo spent most of its revenues on sales and marketing expenses in 2020 and about half of its revenues on sales and marketing expenses in 2021. The company also spends approximately 10% of its revenues on R&D expenses every quarter. As a result, there are limited funds available for the initiation of a dividend.
On the bright side, the trend in these expenses is certainly positive. Thanks to the impressive growth of sales, the ratio of the above expenses to revenues has greatly decreased in recent quarters, with more improvement expected in the upcoming years. As a result, Pinduoduo posted record free cash flows of $2.0 billion in 2021.
Nevertheless, investors should not expect a dividend from Pinduoduo anytime soon. The company is growing its business at such a high rate that it is much more profitable to invest the earnings in the business instead of distributing them to the shareholders.
Pinduoduo has repeatedly stated that it will continue investing heavily in its business in order to improve user engagement and gain more mind share with consumers. The company will continue spending a great portion of its revenues on sales and marketing for the foreseeable future.
As Pinduoduo has many years of double-digit earnings growth ahead, it is not likely to initiate a dividend anytime soon. Instead, its management is likely to remain focused on its growth initiatives. Shareholders of Pinduoduo should be completely satisfied as long as the company keeps growing at a fast pace, without initiating a dividend.
High-growth companies do not offer a dividend for another reason as well. Their stocks usually enjoy such a rich valuation that a dividend is meaningless for the shareholders. To provide a perspective, Pinduoduo is currently trading at 24 times its expected earnings in 2021.
Therefore, even if the company distributes 25% of its earnings in the form of dividends, it will offer just a 1.0% dividend yield. Such a yield will be insignificant for its shareholders, especially given the exciting growth prospects of the company, and hence there is no incentive for the company to initiate a dividend.
Final Thoughts
To sum it up, Pinduoduo is in the early stages of its growth trajectory, with exciting growth prospects ahead thanks to various drivers. As a result, the company will remain focused on its growth initiatives and will continue investing a great portion of its earnings in its business. It is thus not likely to initiate a dividend for the next several years.
Investors who are interested in investing in this high-growth stock should be aware of a risk factor, namely the risk of the stock being delisted from NYSE at some point in the future. While such a delisting is not imminent, some Chinese stocks have been delisted in recent years due to the trade war between the U.S. and China.
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