HONG KONG (Reuters Breakingviews) - Pinduoduo is giving New York investors a taste of Shanghai. The $29 billion e-commerce outfit, a mainland variation on coupon company Groupon, has all the ingredients of Chinese tech: promise, growth - and plenty of volatility. Shares fell more than 17 percent on Wednesday, after it spent far more than expected last year to lure and retain customers. The experience of rivals like Alibaba, though, suggests better times ahead.
Founder Colin Huang has built a business on the back of thrifty shoppers in China’s outer reaches. Pinduoduo lets buyers club together to get discounts, and has become an unlikely challenger to local internet behemoths. But that promise has come with Chinese trading characteristics: the stock has whipsawed since its Nasdaq listing last summer, after allegations of counterfeit goods, then an investigation by Chinese regulators and finally accusations from a short seller that it was overstating sales. The company has said it complies with relevant U.S. rules.
Earnings showed a similar contrast. Growth was impressive, with 2018 sales up nearly sevenfold at almost $2 billion. The pace came at a cost: marketing and related expenses shot up to $2 billion over the 12 months, far more than expected and almost 10 times what Pinduoduo spent in 2017. The subsequent sell-off wiped some $6 billion off the stock.
There is still plenty to like here. For one, Pinduoduo has something of a first-mover advantage - its scale, critical to secure good discounts, plus existing partnerships with the likes of Tencent and its WeChat messaging network, are hard to replicate. That makes it easier to justify the cash spent on new clients. Contrary to traditional retailers, it could also benefit from an economic slowdown as more households tighten budgets. And the scale of the opportunity is huge: the group says it has some 400 million active users, less than half of the Chinese population already shopping and paying online.
Importantly, even much larger rivals suffered similar growing pains. Sales misses and accusations of fake goods plagued Alibaba, then already profitable, soon after its 2014 float. The stock has tripled from a low point touched the following September. That should help get Pinduoduo out of the bargain bin, too.
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