I have long been an admirer of PDD Holdings.
The company has an intriguing team purchase model that allows users to share product information and form shopping teams to get discounts. This has helped suppliers to sell their products directly to consumers and level the playing field for small businesses.
It was so innovative that I even tried to copy it for my Stirling Butchery business during the COVID pandemic.
Last week, PDD reported stunning results for 2Q23. Consequently, the shares price jumped 29% for the week.
Here are some insights:
Blowout 2Q23 results
Mimetic theory of desire
Powered by AI
Superior GMV growth
Agri-tech Darling
Temu versus Amazon-the-Goliath
Blowout 2Q23 results
In summary,
Revenue jumped 66% to RMB52.3bn, beating estimates by 21%
Online marketing services revenue rose 50% to RMB37.9bn, beating estimates by 18%
Trading services revenue rose 131% to RMB14.4bn, beating estimates by 29%
Net income rose 42% to RMB15.3bn, beating estimates by 41%.
Consequently, PDD trades at:
17.9x P/E, 22.8% EPS growth
6.2% Free Cash Flow Yield
19% of market cap in net cash
Mimetic theory of desire
I had a chuckle at the hair hand-raising moment during the GOP election debate.
Florida Governor Ron DeSantis looked around at the other candidates before raising his hands to confirm he would support Donald Trump as the party's nominee. It appears that he was ‘influenced’ into supporting Trump because he saw that the other candidates were doing so.
This is a great illustration of the mimetic theory of desire, coined by French Philosopher, René Girard.
"Man is the creature who does not know what to desire, and he turns to others in order to make up his mind. We desire what others desire because we imitate their desires."
René Girard observed that humans desire what others desire, not what they actually want. This is why a group of kids will inevitably desire the same toy instead of finding their own toy to play with.
This could also be the reason for Governor DeSantis to raise his hands, after checking the views of other candidates.
Understanding this mimetic theory of desire is key to appreciating the team purchase model of PDD.
The team purchase model incentivizes users to join group deals for bulk discounts on certain items. When users see their friends or followers buying a product, they are more likely to desire that product themselves.
This creates a virtuous feedback loop, where the more people who buy a product, the more desirable it becomes.
The team purchase model also benefits suppliers. When they receive a large bulk order, they are able to lower their prices. This makes the product more affordable for consumers, and it also helps to increase demand. As a result, the team purchase model can be a win-win for both consumers and suppliers.
Let me further illustrate with an example of how the mimetic theory of desire works in the team purchase model.
Let's say you are considering buying a new smartphone. You see that your friend has just bought the latest iPhone, and you start to desire that phone yourself. You may not have even been interested in the iPhone before, but now that you see that your friend has it, you want it too.
This is the mimetic theory of desire in action.
The team purchase model of PDD taps into this mimetic desire by creating a sense of urgency and scarcity. When you see that a product is in high demand and that there are only a limited number of units available, you are more likely to want to buy it.
This is why PDD's team purchase model has been so successful. It is a clever way to leverage the mimetic theory of desire to drive sales.
Powered by AI
PDD is steeped in Artificial Intelligence (AI).
The company's founding members, Colin Huang and Chen Lei, are both mathematicians and computer scientists. In fact, Huang was instrumental in launching Google China with Dr. Kai-Fu Lee (I am a big fan of his AI books).
PDD uses AI to power many of its features, including personalized product recommendations, team purchase discounts, and real-time inventory tracking.
Here are some specific examples of how PDD uses AI:
Personalized product recommendations: PDD uses AI to analyze users' purchase history, browsing behavior, and social media activity to generate personalized product recommendations. This helps users to discover products that they are more likely to be interested in.
Team purchase discounts: PDD offers discounts to users who join teams to purchase products. This helps to create a sense of urgency and scarcity, which can drive sales.
Real-time inventory tracking: PDD uses AI to track inventory levels in real time. This helps to ensure that users can only purchase products that are actually in stock.
The use of AI has made PDD a highly efficient company. The company is able to process millions of transactions per day and deliver products to customers quickly and reliably.
This was further evidenced by PDD’s high revenue-to-employees ratio of 10x compared to Alibaba and JD's ratios of 3.3x and 2.3x, respectively.
Superior GMV growth
PDD has emerged as a major player in the Chinese e-commerce market, despite being a latecomer to the industry.
The company has achieved this by leveraging WeChat, the most popular messaging app in China, and targeting third- and lower-tier cities, where there was less affordable option for online shopping.
PDD's success can be attributed to a number of factors, including:
Low prices: PDD focuses on low prices as an attraction, which is attractive for people in the lower-tier cities who are more sensitive to prices.
Gaming features: PDD uses gaming features to make the team purchases a fun one. This helps to reduce the social stigma of asking their friends to engage in bulk purchases for price discounts.
As a result of these factors, PDD’s GMV of of RMB3.9 trillion has now surpassed JD’s RMB3.7 trillion, and is almost half of Alibaba's GMV of RMB8.1 trillion.
This was achieved via a hefty average GMV growth of 97% in the seven years, which is significantly above the average GMV growth of 17% and 26% for Alibaba and JD respectively.
Agri-tech Darling
Pinduoduo has been largely unaffected by the regulatory crackdown on China's tech sector. This is likely due to the company's strong support of the agricultural sector.
Pinduoduo's 10 Billion Agriculture Initiative has helped to improve the distribution efficiency of agricultural products, cover thousands of production regions, and bring scale to agri-tech solutions. This has benefited both farmers and consumers by providing them with fresher and higher-quality agricultural produce, as well as a faster turnover.
The company's focus on the agricultural sector is likely to be seen favorably by the regulators, who are keen to support rural development.
This is evidenced in the superior outperformance of 83% compared to Alibaba in the past three years.
Temu versus Amazon-the-Goliath
Amazon has been the dominant player in the e-commerce market for decades, but PDD has the potential to disrupt the market, just as TikTok has taken significant market share from Facebook in social media (with their recommendation AI algorithms).
PDD has already disrupted the e-commerce market in China, where it is now the second-largest player after Alibaba. The company has achieved this by leveraging its innovative team purchase model.
Now, PDD has set its sights on international expansion. One year ago, PDD launched its US business under the Temu app, which means "team up, price down".
The app has already had significant traction, with over 70 million downloads. This is no small feat, considering that there are only 310 million smartphones in the US.
While PDD has not released any specific numbers about Temu's growth, we can deduce that it is the bulk of the transaction service revenue growth of 11% in 2Q23. This could amount to around RMB6bn, or a credible 11% of 2Q23 revenue.
PDD is also expanding into other markets, including Europe and Southeast Asia. The company has already topped the iOS App Store download ranking in countries including the US, Canada, and the UK.
While it is still early days, PDD's international expansion is off to a strong start. Further expansion could transform PDD to be a major player in global e-commerce, and triggered a strong valuation re-rating.
In conclusion, I will end off with the above slogan from Temu.
Temu may want you to ‘shop like a billionaire’, but PDD can help you become one, if you invest in it. :)