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If You Can Explain China's Pinduoduo, Lunch Is on Me

Tim Culpan
1 / 7

If You Can Explain China's Pinduoduo, Lunch Is on Me

If You Can Explain China's Pinduoduo, Lunch Is on Me

(Bloomberg Opinion) -- If you’re the investor who’s been pumping the stock of China’s Pinduoduo Inc. for the past six months, please give me a call. I’ll take you to lunch.

Over dumplings and Moutai, you can explain why you think the Chinese group-buying company is worth 60 percent more than its IPO price, which is where the stock sat before Wednesday’s earnings wake-up call. If you can convince me that it’s worth seven times more than peers on a price-to-book basis, or 970 times free cash flow, then I’ll order champagne.

Bring your pitch deck and show me the numbers.

In return, here’s what I see. 

Let’s start with that amazing first-day pop (41 percent), followed by a five-day slide back to the IPO price, and then various periods of sustained (and successful) efforts to push the stock higher. 

But that wasn't enough to stave off the hoards of investors who dumped the stock Wednesday.

What the company wanted you to see was this lovely, big fat number: revenue up 379 percent. That, and gross merchandise volume, were put at the top of its earnings press release to ensure investors could see the scale of the company’s awesomeness.

But what executives probably hoped you wouldn’t notice is the more-important data on earnings, which it kind of buried on page two. Such as operating loss, which widened 116 times over the period. That’s times, not percent.

 

That’s because marketing costs blew out by an extraordinary amount in the space of a year.

When marketing exceeds sales, as it did for the second time in three quarters, management is effectively buying revenue not earning it. Imagine how much you could bring in if you sold $100 notes for $93 apiece.

This should be a concern to investors. It’s reasonable to buy into a company that’s growing – and will eventually turn a profit, thanks to size and economies of scale. That argument is harder to make when it’s listed, and still purchasing revenue four years after its founding.

To put that in context, Pinduoduo doesn’t compare well to industry peers in key metrics like price-to-sales or price-to-free cash flow.

Dear mystery investor, I totally get that you’re investing in the hopes and dreams of a Chinese e-commerce company that’s going capture a share of consumer spending by the world’s largest middle class. But there are so many other companies trying to do the same, and each of them is facing the same competitive pressures and economic headwinds.

So, explain to me how Pinduoduo is worth so much and I’ll buy you lunch. I have a feeling you could do with a free meal right now.

To contact the author of this story: Tim Culpan at tculpan1@bloomberg.net

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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