• A pandemic-led sustained surge in online shopping pushed Pinduoduo to profitability.
  • Tightening regulations in China elevate risks for PDD investors.

Pinduoduo Inc. (NASDAQ: PDD) closed at $83.24 in the latest trading session but declined 0.65% to $82.70 after hours. There was no change from the previous day’s close at writing (Wednesday, 10 November 2021 0651 UTC).

Today, Pinduoduo’s shares had lost 12.22% in the past month. At the same time, the S&P 500 added 7.43%. 

On the surface, the PDD shares appear to be in a rough patch, and one might easily dismiss them as unreliable. But a look at the chart below easily tampers the notion.

A daily Pinduoduo chart with Bollinger Bands and ATR as of 10 November 2021.

Apparently, PDD stock is coming from a period of extreme volatility, especially in the early months of 2021. Moreover, the earnings reports for Q4 2020 and Q1 2021 did not seem to generate considerable interest in the stock. The point is that the Bollinger Bands and the ATR indicate subsiding volatility, implying that market sentiment is shifting.

Going into the release of Q3 2021 earnings, investors will be watching out for factors that stimulated upside price action in the latest earnings report. 

Particularly, Wall Street’s eyes will be looking for positivity from Pinduoduo. Even then, analysts expect PDD to report $0.15 per-share earnings, a 250% growth from the same quarter in the previous year. Wall Street also expects the company’s revenue in the upcoming earnings release to shoot up 91.63% to $4.01 billion, compared to the prior-year quarter.

Growing MAUs buoying Pinduoduo’s prospects

In other words, the chart above shows that, while bears are predominant, the stock is gaining more buyers. So why would investors buy PDD in a bearish trend?

In the first place, Pinduoduo posted its first quarterly profit in the latest earnings release – an operating profit of $309.4 million compared to a loss of about $256 million in the same quarter in 2020.

In Q2 2021 earnings release, the company said that most of the profits came from online shoppers netted during the pandemic. It seems, therefore, that the pandemic-led wave of online shopping will not go away soon.

Because of the wave, Pinduoduo gained 30% more monthly active users (MAUs), bringing the total MAUs for the quarter to 738.5 million from 568.8 million in the prior-year quarter. However, it is worth noting that the quarter-to-quarter marginal increase in MAUs was significantly low. Pinduoduo added just about 4 million new MAUs in Q2 2021.

A chart showing the number of MAUs of Pinduoduo from Q2 2018 to Q2 2021.

Tightening regulations in China is PDD’s most significant headwind

The prime culprit for the heightened volatility in PDD’s share price for much of 2021 is the tightening of tech regulations in China, which tampered with the appetite for Chinese stocks. So, until the risk disappears, PDD might still exhibit considerable volatility.

In the meantime, Pinduoduo holds high potential mainly because of innovative features like “team purchase.” The company is also heading into its strongest quarter since the Chinese market is often active around Christmas and new year celebrations. 

Bottom line

Undoubtedly, PDD’s poor year-to-date form is likely to influence a substantial chunk of the market, but there is room for a dramatic shift. Even with the weight of a regulatory crackdown, the company increased quarterly MAUs, growing the top line to $5.9 billion. 

So, if Q4 2021 plays out as expected, the company is likely to extend the top line growth to $8 billion in the second half of 2021. However, investors are likely to await the Q3 earnings to form a concrete mindset.