Pinduoduo user growth and engagement efforts weigh as Q1 losses deepen

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Pinduoduo share prices slid 8.5% to $20.78 on Monday after the Chinese social e-commerce platform reported surging losses for the first quarter of the year on significantly higher promotional expenses, while user engagement efforts gained traction.

The company recorded total revenue for the quarter of RMB 4.6 billion (around $677.3 million), an increase of 228% from RMB 1.4 billion in the same quarter of 2018, driven by growth in online marketing revenues earned from the platform’s merchants. Annual spending per active user surged 87% compared with Q1 2018, and monthly active users (MAU) jumped 74% year on year to 289.7 million, according to the statement.

However, heavy spending weighed, particularly sales and marketing expenses, which quadrupled from the same period a year earlier to RMB 4.9 billion (around $728.5 million) on promotional activities driven by on- and offline advertisements and promotions, according to the company. Pinduoduo sponsored the CCTV Spring Festival Gala, China’s biggest annual TV event boasting 1.2 billion viewers in 2019, and a series of online promotions leading up to the TV event.

The company booked net losses of RMB 1.88 billion, more than six times the RMB 281.5 losses in Q1 2018.

Pinduoduo’s total cost of revenues were RMB 873.3 million, an increase of 174% from RMB 318.7 million in Q1 2018. The increase was mainly due to higher costs for cloud services, and call center and merchant support services, partially offset by a payment rebate of RMB 339.2 million from Tencent.

Meanwhile, its gross merchandise volume (GMV) in the 12-month period ended March 31, 2019 was RMB 557.4 billion ($83.1 billion), an 181% year-on-year increase from Q1 2018, mainly driven by “the rapid growth in annual active buyer base and annual spending per active buyer,” according to Huang Zheng, Chairman and Chief Executive Officer of Pinduoduo. “These metrics reflect our success in increasing user engagement and improving user experience,” he added.

Similar to rivals Alibaba and JD the four-year-old e-commerce upstart known for its breakneck expansion is also facing slowing growth. Its Q1 total revenue growth signals a marked slowdown from the triple and quadruple growth figures seen last year.

In comparison, Alibaba and JD posted 51% and 20.9% year-on-year growth in Q1 2019, respectively.

“We are very confident of our long-term earning power. So I think at this stage, the best way to use the revenue proceeds is probably to investing R&D, investing in infrastructure,” company CEO Huang Zheng said during the earnings call.