PDD (NASDAQ: PDD), frequently referred to as Pinduoduo, currently holds the title of China’s third largest e-commerce company by annual revenue, following Alibaba (NYSE: BABA) and JD.com (NASDAQ: JD). Nevertheless, it is displaying an accelerated growth trajectory surpassing that of the market leaders.
The company established itself merely nine years ago; it initially specialized in a discount marketplace before venturing into the online agricultural space. From 2018 to 2022, PDD demonstrated an extraordinary compound annual growth rate (CAGR) of 78% in annual revenue. Analysts are projecting an 81% growth in 2023. Notably, PDD achieved profitability according to generally accepted accounting principles (GAAP) in 2021, and its net profit almost quadrupled in 2022. Additional projections suggest a 49% increase in its earnings for 2023. This meteoric rise in growth supports the comparison to global giant Amazon.
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Despite these impressive growth rates, can PDD continue its expansion and supplant Alibaba and JD as the “Amazon” (NASDAQ: AMZN) of China? A comparison of PDD’s business model and growth trajectory to that of Amazon’s can help us gauge its potential.
PDD Vs. Amazon: A Comparative Analysis
Fielding as mammoth e-commerce entities, PDD and Amazon have diverging business models. Pinduoduo has primarily functioned as a third-party marketplace after phasing out its lower-margin first-party marketplace in 2021 to enhance profitability. In contrast, Amazon still manages both first-party and third-party marketplaces.
Pinduoduo’s core marketplace fosters collective buying through social media platforms to unlock bulk discounts. This strategy attracted shoppers from Alibaba and JD in China’s lower-tier cities. While Amazon primarily offers bulk discounts to businesses, certain sellers on the platform extend this benefit to select items.
Pinduoduo currently does not manage any first-party brick-and-mortar stores, whereas Amazon administers its own outlets such as Amazon Go, Amazon Fresh, and Whole Foods Market. Both companies engage in the sale of fresh produce online, yet Amazon mainly acts as an intermediary grocer, while Pinduoduo directly connects farmers to shoppers through its marketplace. This farm-to-table strategy facilitated it in vending cheaper produce and establishing itself as China’s largest online agricultural platform.
PDD has also been expanding into the international market with Temu, a cross-border marketplace that enables Chinese sellers to peddle their products to overseas buyers. Temu has surged to become one of the most downloaded shopping apps in the U.S., Europe, and other markets. Conversely, Amazon facilitates the connection between Chinese sellers and international buyers through its third-party marketplace.
On a final note, Amazon owns Amazon Web Services (AWS), the world’s largest cloud infrastructure platform. AWS has emerged as Amazon’s core profit stream due to its ability to generate higher-margin revenue compared to its lower-margin marketplaces. While PDD does not possess an equivalent cloud platform, its overall profits have been uplifted by economies of scale.
PDD Resembles Amazon in 2010
Analysts are projecting PDD to yield 235.8 billion yuan ($33.1 billion) in revenue for 2023, placing it on par with Amazon in 2010 when it generated $34.2 billion. Amazon had achieved a 32% CAGR in revenue from 2005 to 2010, compared to PDD’s estimated five-year CAGR of 78% from 2018 to 2023.
Further projections estimate a 24% CAGR bringing Amazon’s revenue to $570.9 billion from 2010 to 2023. Should PDD replicate this 24% CAGR over the next 13 years, it could generate 4 billion yuan ($562 billion) in revenue by 2036, achieving parity with today’s Amazon. Presently, analysts are expecting PDD’s revenue to grow at a CAGR of 46% from 2022 to 2025, solidifying its potential to become the “next Amazon.”
Potential Challenges on PDD’s Journey
Notwithstanding its ascending trajectory, potential regulatory obstacles loom on the horizon. PDD profited from China’s antitrust crackdown on Alibaba in 2021, which curbed its primary competitor by prohibiting aggressive promotions and exclusive deals. If PDD surpasses Alibaba in scale, it might also encounter similar antitrust fines and restrictions.
Moreover, its international expansion could garner close scrutiny from U.S. regulators amid escalating tensions between the U.S. and China. Alphabet‘s Google suspended Pinduoduo’s main app from its Play Store last year due to spyware concerns, while the prominent short seller Grizzly Research reported that Temu contained spyware in September. Though PDD relocated its headquarters from Shanghai to Dublin last year, it continues to be perceived as a Chinese entity as long as the majority of its revenue is derived from China. This perception could impede its international expansion, impeding its role as the prime driver for long-term growth.
Could PDD Emerge as the “Amazon of China”?
Presently sporting an enterprise value of $165 billion, PDD remains substantially smaller than Amazon, valued at a staggering $1.68 trillion. With its stock currently reasonably valued at 22 times next year’s earnings, PDD stands to encounter hurdles on its path. Yet, it possesses substantial room for expansion and could plausibly outstrip Alibaba and JD to emerge as the definitive “Amazon of China” over the impending decades.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun holds positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, and JD.com. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.