[BT Financial Analyst] PDD Holdings' social commerce is considered innovative, and analysts say Amazon would suffer significant losses if it does not replicate it.

PDD Holdings is an innovative technology company that pioneered the concept of social group buying. Its latest earnings report revealed strong financial performance in the third quarter of 2022, with both revenue and profit growth exceeding expectations. The company is also well-positioned to continue benefiting from China's expanding middle class. Therefore, in this article, I will analyze PDD Holdings' financials and valuation.

PDD Holdings comprises two main businesses: the social e-commerce platform Pinduoduo, and the e-commerce marketplace Temu, which targets North American consumers.

PDD Holdings pioneered the "group buying" model, in which customers form "teams" to purchase goods directly from suppliers at substantial discounts. The platform's marketing slogan perfectly encapsulates this: "The more you group, the more you save, the more fun you have."

As a Western consumer, I was surprised to find that companies like Meta or Amazon have not tried to replicate this innovative feature. The benefit of the "social commerce" model is that it provides a low-cost user acquisition channel, as existing customers will encourage their friends to sign up, since both parties stand to save money.

The company serves more than 900 million customers across its ecosystem. It has also established an extensive logistics network, which could create significant barriers to entry for competitors.

$PDD Holdings (PDD.US)$PDD Holdings announced solid financial results for the third quarter of 2022. The company's revenue reached US$4.99 billion (approximately RMB 35.5 billion), up 65% year on year. This growth was primarily driven by an increase in the company's online marketing services revenue, which accounted for about 80% of total revenue and rose 58% year on year to US$3.996 billion. Revenue from the company's transaction services also surged to US$987 million, a year-on-year increase of 102%. However, PDD Holdings' gross merchandise value declined by 31% year on year to US$7.9 million.

Due to higher fulfillment costs and payment-processing fees, the company's cost of revenue increased by 13% to $1 billion.

In addition, PDD Holdings' operating expenses amounted to US$2.48 billion (RMB 17.7 billion), up 38% year on year, which is astonishing. Fortunately, the increase in spending was mainly driven by sales and marketing expenses. Its marketing expenses totaled US$1.98 billion, up 40% year on year, primarily due to increased advertising and marketing efforts. Overall, if a company is acquiring customers and generating sales in a way that leads to long-term profitability, I don't think this is a major issue.

[This article is a condensed version by BT Finance's financial analyst. Starting October 25, BT Finance will no longer publish the full-length version on any platforms other than the BT Finance Data Pass mini-program and app.]

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