In the fast-changing tech world, it’s not unusual to see a company that’s not yet profitable have a soaring share price.
The reason is simple: investors love growth potential. If a tech company can deliver consistently impressive growth rates in its business, stock market participants are willing to put up with a negative number on the bottom line—at least in the short term.
That also means, when a soaring tech stock finally turns a profit, it could attract even more investors.
Check out Pinduoduo Inc (NASDAQ:PDD), for instance. It’s a Chinese e-commerce company that features more attractively priced merchandise compared to its competitors.
To American investors, Pinduoduo may not be as well-known as Alibaba Group Holding Ltd (NYSE:BABA) or JD.com Inc (NASDAQ:JD)—in part because those two stocks have been trading on U.S. stock exchanges quite a bit longer than PDD stock, which went public on the Nasdaq in July 2018.
Pinduoduo is also a much younger company compared to both Alibaba and JD. In fact, when BABA stock and JD stock started trading in the U.S. in 2014, Pinduoduo Inc did not even exist—it was founded in September 2015.
But Pinduoduo quickly became one of the fastest-growing e-commerce platforms in the world. Consider this: in the 12-month period ended September 30, 2018, Pinduoduo had a whopping 385.5 million active buyers—a number higher than the entire U.S. population. Two years later, the platform’s trailing 12-month active buyers had grown to 731.3 million. (Source: “Pinduoduo 3Q 2020 Results,” Pinduoduo Inc, last accessed November 23, 2020.)
As you’d expect from a tech company with those astonishing numbers, Pinduoduo has stock shot through the roof.
Take a look at the chart below. Since the company’s initial public offering (IPO), it has delivered a staggering return of more than 650%.
Pinduoduo Inc (NASDAQ:PDD) Stock Chart
Chart courtesy of StockCharts.com
Acquiring such a massive user base was a costly endeavor—especially in a market that already had two well-established incumbents. So, unsurprisingly, Pinduoduo reported losses quarter after quarter—until now.
On November 12, the e-commerce company reported that, in the third quarter of this year, it generated adjusted earnings of $0.05 per share. (Source: “Pinduoduo Announces Third Quarter 2020 Unaudited Financial Results,” Pinduoduo Inc, November 12, 2020.)
This not only marked a substantial improvement from the prior quarters—in which the company incurred adjusted losses—but also outperformed Wall Street’s expectations. On average, analysts expected Pinduoduo to report an adjusted net loss of $0.17 per share.
Achieving the first-ever quarterly profit is a big deal for a fast-growing tech stock. In the trading day following the company’s third-quarter earnings release, Pinduoduo stock surged 20.4%.
Mind you, the bottom-line number was not the only metric the company managed to improve recently. Pinduoduo Inc’s growth momentum has continued across the board.
For instance, look at its gross merchandise volume (GMV), a critical measure of an e-commerce company’s performance that represents the total value of all orders for products and services placed on the platform.
The company’s GMV totaled RMB1,457.6 billion ($214.7 billion) in the 12-month period ended September 30, a 73% increase year-over-year.
Moreover, Pinduoduo had 643.4 million monthly active users in the third quarter of 2020. That was up 50% from the 429.6 million it had in the third quarter of 2019.
Each user was also spending more money on the platform than before. In the 12 months ended September 30, Pinduoduo Inc’s annual spending per active buyer came in at RMB1,993.1 ($293.60), marking a 27% increase from the year-ago period.
The company was able to successfully monetize its expanding e-commerce platform. In the reporting quarter, Pinduoduo’s total revenue increased 89% year-over-year to RMB14.2 billion ($2.1 billion).
One of the growth drivers for the company has been groceries.
In Pinduoduo’s latest earnings conference call, the company’s chief executive officer, Chen Lei, said:
Post-pandemic we have noticed that consumer habit of grocery shopping in a wet market or supermarket are shifting. Many of our users have shifted to online channels for their daily staples. We saw a surge in orders for agricultural products in the first half of the year, not just for fruit and other root vegetables that can be easily transported, also for leafy vegetables and delicate foods.
(Source: “Pinduoduo Inc. (PDD) CEO Chen Lei on Q3 2020 Results – Earnings Call Transcript,” Seeking Alpha, November 12, 2020.)
He added that Pinduoduo is now “China’s largest online platform for agricultural products.”
In a country with a population of around 1.4 billion, being a dominant player in the online grocery business could serve as a multi-year catalyst for PDD stock.
Put it all together and you see that Pinduoduo Inc could be something special.
If the company can maintain the growth momentum of its business while staying profitable, I wouldn’t be surprised to see Pinduoduo stock continue to travel on its uptrend.