PDD (NASDAQ: PDD), more commonly known as Pinduoduo, is China’s third largest e-commerce company by annual revenue after Alibaba (NYSE: BABA) and JD.com (NASDAQ: JD). However, it’s still growing faster than both those market leaders.
PDD was founded just nine years ago, but it carved out a niche with its discount marketplace before expanding into the online agricultural space. From 2018 to 2022, its annual revenue grew at a stunning compound annual growth rate (CAGR) of 78%, and analysts expect 81% growth in 2023. PDD also turned profitable on a generally accepted accounting principles (GAAP) basis in 2021, and its net profit nearly quadrupled in 2022. Analysts expect its earnings to rise another 49% in 2023.
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Those growth rates are impressive, but can PDD continue to expand and replace Alibaba and JD as the “Amazon (NASDAQ: AMZN) of China”? Let’s compare PDD’s business model and growth trajectory to Amazon’s to find out.
Comparing PDD and Amazon
PDD and Amazon are both massive e-commerce companies, but their underlying business models are quite different. Pinduoduo has primarily been a third-party marketplace ever since it phased out its lower-margin first-party marketplace to boost its profitability in 2021. Amazon still operates first-party and third-party marketplaces.
Pinduoduo’s core marketplace encourages its shoppers to team up on social media platforms to score bulk discounts. That strategy enabled it to pull shoppers away from Alibaba and JD across China’s lower-tier cities. Amazon usually only offers bulk discounts for businesses, but some of its sellers offer bulk discounts for certain items.
Pinduoduo doesn’t operate any first-party brick-and-mortar stores, but Amazon operates its own stores (Amazon Go and Amazon Fresh), as well as Whole Foods Market. Both companies sell fresh produce online, but Amazon is mainly an intermediary grocer, while Pinduoduo directly connects farmers to shoppers through its own marketplace. That farm-to-table strategy enabled it to sell cheaper produce and become China’s largest online agricultural platform.
PDD has also been expanding overseas with Temu, a cross-border marketplace which enables its Chinese sellers to peddle their products to overseas buyers. Temu is now one of the most downloaded shopping apps in the U.S., Europe, and other markets. Amazon connects Chinese sellers to international buyers through its third-party marketplace.
Lastly, Amazon owns Amazon Web Services (AWS), the world’s largest cloud infrastructure platform. AWS has become Amazon’s core profit engine over the past decade because it generates higher-margin revenue than its lower-margin marketplaces. PDD doesn’t own a comparable cloud platform, but economies of scale have been boosting its total profits.
PDD Resembles Amazon in 2010
Analysts expect PDD to generate 235.8 billion yuan ($33.1 billion) in revenue in 2023. That would make it comparable to Amazon in 2010, when it generated $34.2 billion in revenue. Prior to that, Amazon had grown its revenue at a CAGR of 32% from 2005 to 2010 — compared to PDD’s projected five-year CAGR of 78% from 2018 to 2023.
From 2010 to 2023, Amazon’s revenue is expected to rise at a CAGR of 24% to $570.9 billion. If PDD also grows at the same CAGR of 24% over the next 13 years, it could generate 4 billion yuan ($562 billion) in revenue and be roughly comparable to today’s Amazon by 2036. For now, analysts expect PDD’s revenue to grow at a CAGR of 46% from 2022 to 2025 — so it certainly seems to have a shot at becoming the “next Amazon.”
Potential Challenges for PDD
However, investors should be aware of the regulatory threats. PDD benefited from China’s antitrust crackdown on Alibaba in 2021, which hobbled its top competitor by banning its aggressive promotions and exclusive deals with merchants. But if PDD grows larger than Alibaba, it could also be hit by similar antitrust fines and restrictions.
Meanwhile, its overseas expansion could be scrutinized by U.S. regulators if tensions between the U.S. and China continue to intensify. Alphabet‘s Google already suspended Pinduoduo’s main app from its Play Store last year amid spyware concerns, while the prolific short seller Grizzly Research claimed that Temu contained spyware in a report last September.
PDD tried to allay those concerns by moving its headquarters from Shanghai to Dublin last year, but it could still be widely seen as a Chinese company as long as it generates most of its revenue from China. That perception could hamper its overseas expansion and prevent it from becoming the next major catalyst for its long-term growth.
Future Prospects and Considerations
With an enterprise value of $165 billion, PDD is still a lot smaller than Amazon, which is worth a whopping $1.68 trillion. Its stock is also reasonably valued at 22 times next year’s earnings. The road ahead might be bumpy, but it has plenty of room to grow and could easily eclipse Alibaba and JD as the true “Amazon of China” over the next few decades.
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