Uncertain outlook makes PDD stock a sell

Shares in a Chinese e-commerce platform Pinduo (NASDAQ:PDD) have been struggling since early last year when they peaked above $200. Today, PDD stock is trading in the low $40 range.

Recent growth metrics have been underwhelming. And it’s hard to say whether the company’s ongoing strategy shifts will ultimately succeed. In addition, the company is exposed to several regulatory risks.

Given these challenges, I recommend investors to sell PDD stock.

Pinduoduo reports weak growth figures

Pinduoduo announced Fourth Quarter and Full Year Results on March 21st. Although some aspects of the company’s growth were strong, overall revenue growth was weak in the most recent quarter.

In the fourth quarter, revenue rose just 3% year over year to 27.2 billion Chinese yuan. fall short of estimates. And average monthly users grew just 2% year over year to 733.4 million.

“Our revenue growth slowed due to moderate user growth and fluctuations in user activity,” he said June LiuVice President of Finance at Pinduoduo, in a statement on earnings.

On the bright side, the company reported a 108% year-over-year increase in “transactional services revenue” for the fourth quarter, as well as a 33% increase in annual spend per active buyer for 2021.

Net income also improved, with Pinduoduo reporting 6.6 billion yuan from a loss in the fourth quarter of 2021. However, the company attributed this in part to cost cutting and “a one-time rebate from one of our service providers.”

This leads me to believe that the company’s profitability may have peaked. By definition, a “one off” discount is unlikely to be repeated. And there’s no guarantee the company can cut costs any further. Even if this were possible, it could have a significant negative impact on Pinduoduo in the future.

Pinduoduo’s change of strategy is difficult to assess

Pinduoduo appears to have largely abandoned its merchandise sales business as revenue from this category fell 98% year on year to just 81.7 million yuan in the fourth quarter. Instead, the company is moving into agriculture to “deep.” [its] Efforts towards digital inclusion in agriculture,” says CEO Le Chen.

I have to admit that I know very little about farming. But I think many people will have trouble understanding the phrase ‘digital inclusion efforts in agriculture’.

Does Pinduoduo use technology to enable farmers to get their crops to market faster or find the most lucrative buyers for their produce more efficiently? Is it focused on introducing and/or selling more advanced agricultural machinery?

Except that Pinduoduo was after it sell more agricultural products without commission Chen has used various methods to promote and market agricultural products in China, and “advocated the introduction of agricultural technology,” Chen wasn’t very specific about what the new strategy entails on the company’s fourth-quarter earnings call brings. He also didn’t explain why the company thinks its new approach will be successful. And he certainly hasn’t presented any statistics showing the extent to which the strategy has been successful so far.

It seems Pinduoduo is trying to curry favor with China’s farmers to become the leading online seller of agricultural products in China. But the company’s “zero-commissions” policy makes it sound like it’s not making much, if any, money from the initiative yet. And it is difficult to determine the extent to which Chinese consumers want to buy agricultural products online.

In the United States, grocery stores sell their products online, but I’ve never heard of an e-commerce company that focuses on selling farmer’s products online. So I’m not sure if Pinduoduo’s strategy will work.

Regulatory threats remain

As I’ve noted in columns since November 2020, Beijing has imposed harsh penalties on many Chinese consumer-centric companies. Although China’s government hinted last month that it would be Tech raid is overI wouldn’t be surprised if the Chinese government resumed its attacks on big tech companies sooner rather than later.

Meanwhile, the American Public Company Accounting Oversight Board (PCAOB) recently hinted at It may not be possible to reach an agreement with the Chinese authorities to audit Chinese companies whose shares are traded in the US

as Reuters reported: “In December, the US Securities and Exchange Commission (SEC) finalized the rules for delisting Chinese companies under the Holding Foreign Companies Accountable Act (HFCAA) and said it had identified 273 companies at risk without naming them.”

Pinduoduo is considered one of these companies. That’s why PDD stock exploded last week after Beijing reported it “authorizes” its regulators. “to find a mechanism for compliance with foreign accounting regulations.”

However, additional audits and delisting remain major risks for PDD stocks.

The conclusion of the PDD share

Pinduoduo’s overall growth has been slow, and it’s difficult to determine whether its new strategy will work. In addition, the company faces a strict regulatory environment. For these reasons, I recommend investors to sell PDD stocks.

At the time of publication, Larry Ramer held no position (neither directly nor indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s publicity guidelines.

Larry Ramer has been researching and writing articles on US equities for 13 years. He was employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. His highly successful contrarian picks included GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer.

Larry Ramer has been researching and writing articles on US equities for 15 years. He was employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. His highly successful contrarian picks included GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer.

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