Pinduoduo shows it can be profitable if it chooses to

Throughout Q2 this year, we have been hearing from multiple sources in China that Pinduoduo actually reduced marketing and customer acquisition spent across its all business areas.

Optimists’ interpretation was that it was responding to government requirements to stop selling below cost, especially in community group buy. Pessimists interpret it differently: some believe that it is a lack of leadership (thus momentum) after Colin Huang’s abdication; while others point to exhausted growth opportunities.

We thought the ‘exhausted growth opportunities’ hardly holds, because it had the cash to invest – and it probably had a leading position in ecommerce for agricultural produce.

Profitability is possible

With the newly announced Q2 earnings, things seem to have become apparent – it was a deliberate act to show the investors that the company can achieve profitability:

• Operating profit in the quarter was RMB1,997.5 million (US$309.4 million), compared with operating loss of RMB1,639.6 million in the same quarter of 2020. Non-GAAP⁴ operating profit in the quarter was RMB3,185.2 million (US$493.3 million), compared with non-GAAP operating loss of RMB725.1 million in the same quarter of 2020.
• Net income attributable to ordinary shareholders in the quarter was RMB2,414.6 million (US$374.0 million), compared with net loss of RMB899.3 million in the same quarter of 2020. Non-GAAP net income attributable to ordinary shareholders in the quarter was RMB4,125.3 million (US$638.9 million), compared with non-GAAP net loss of RMB77.2 million in the same quarter of 2020.

If it chooses to. 

Investing in agriculture

The company also stresses that it would invest RMB 10 billion (US$1.55 billiion) in agricultural initiatives. In the earnings call, ‘agriculture‘ or ‘agricultural‘ was mentioned 57 times.

CEO Lei Chen warned that current and near future profits will be invested into this initiative during the call:

Although RMB10 billion agriculture initiatives will clearly impact the short-term earnings per share for shareholders, it has already received the support and approval of the Board of Directors, and it will be personally overseen by myself. 

Brilliant move, more to prove

Investors seem to be responding to the earnings and initiatives positively. The stock price jumped more than 20% to close the first trading day after the announcement.

Indeed, after showing profitability as well as growth despite reduced spending, Pinduoduo is now able to restart the growth engine to try to capture more wallet share from Alibaba. As further growth of user numbers is unlikely, with 850 million “active buyers” – unless it goes overseas (risky).

The Q2 showcase was highly strategic, probably risky, but brilliantly done.

The real test, though, still lies ahead. The young company still has a lot to prove.