China-based social e-commerce platform Pinduoduo (NASDAQ: PDD) Shares have rocketed since its Q3 2022 earnings report. Unlike China’s largest e-commerce and internet company JD.com (NYSE: JD)Pinduoduo incorporates an interesting twist on e-commerce by adding a real social element to purchases.
It’s kind of in between Amazon (NASDAQ: AMZN ), eBay (NASDAQ: EBAY ), Etsy (NASDAQ: ETSY ), Pinterest (NASDAQ: PINS)and Facebook (NASDAQ: META).
Pinduoduo has found incredible success executing a social e-commerce model that sounds great in theory, but the execution has been astounding. Top line growth has been 65% in Q3 2022 during the COVID shutdowns and accelerated sequentially, up from just 7% in Q1 2022. They have contracted directly with manufacturers and farmers to connect with users and control their supply chains with tactical precision .
The social e-commerce model
The concept is unique as it allows consumers on its app to form teams when purchasing products at a deep discount for the group directly from manufacturers. By cutting out the middlemen, the discounts are passed on to consumers. Users can “pin” products they find interesting or desirable, and discounts grow as more users pin the product for purchase.
This motivates users to use social media to obtain greater discounts. In fact, the app tells you how much it would cost if purchased individually and the discounted price if purchased with a team. As you connect with more users, the app also provides updates on what other team members are pinning and buying and which items are popular.
The intuitive interface provides recommendations with the number of pins and discounted costs. It’s a browser-centric, not search-centric, app that’s akin to traversing a massive online bazaar with frenzied activity among millions of users.
The low prices can range from 20% to 90% off retail. It also has a large agricultural segment that accepts farmers to sell bulk goods directly to consumers using the team buying model.
Staggering pace of growth
On November 28, 2022, Pinduoduo reported its Q3 2022 earnings. The company reported earnings per share (EPS) of $1.20 per share, beating consensus analysts’ estimates by ($0.47). Revenue rose 65% year-over-year (YoY) to $4.99 billion, beating analyst estimates by $621 million.
Operating profit rose 388% to $2.14 billion. Pinduoduo CEO Chen Lei commented, “We help upgrade real-economy businesses and manufacturers by connecting them directly to end consumers. Our pioneering team purchasing model can quickly and directly connect devices by aggregating consumer demand.
We have leveraged digital e-commerce technology to shorten the product development cycle and help manufacturers create products that closely address market needs. This can help manufacturers build their brand.”
Seed Wave Breakout Pattern
The candlestick chart on PDD has triggered a rare seed wave breakout. Shares were down with a falling weekly 20-period exponential moving average (EMA) followed by the 50-period MA. PDD shares made a market structure low (MSL) of $23.21 (A) on March 14, 2022.
The stochastic bounced up through the 20 band to form its first MSL trigger at a $55.38 breakout, which was not realized until June 6, 2022. The stock continued to rally until it topped out and formed a market structure high (MSH) of $68.71 (B) ) June 27, 2022.
It fell back below the weekly 50-period MA and the weekly 20-period EMA to the $45.25 low and formed a second MSL trigger on a breakout through $63.69 that occurred on August 29, 2022, which then collapsed back below the lower ascending price channel below $55.38 to form a bear flag.
This caused short sellers to pile in as shares fell to a low of $38.80 before reeling back up through the second MSL trigger of $63.39 on November 7, 2022. This bear trap and short squeeze contributed to to create the rare and powerful seed wave burst defined by two sequential higher MSL triggers.
When this happens, a Fibonacci (fib) extension is drawn from the first MSL at point A at $23.21 to the first MSH at point B at $68.71. The three fib extensions provide upside targets based on 1.27, 1.414 and 1.68 ratios. This provides upside targets at $80.91, $87.55 and $96.78, which are also Price Reversal Zones (PRZs).
It is important not to chase these fib target levels, but look for reversals to support levels if you are looking for entries. The pullback support levels are $74.12, $69.89 gap filling zone, $63.69 weekly MSL #2 trigger, $55.38 weekly MSL trigger, $52.00, $47.67, and $38.80 weekly swings.
China zero-Covid restrictions eases
There has been a lot of criticism for the zero COVID restrictions in China which have literally suffocated the economy. Protests among students and residents appear to be having an impact as many regions have begun to loosen restrictions. This has helped bolster the rally back into Chinese stocks, including strong peaks in JD.com, XPeng (NASDAQ: XPEV), Bilibili (NASDAQ: BILI), Alibaba (NASDAQ: BABA)and Baidu (NASDAQ: BIDU).
Pinduoduo has expanded its platform to the US with its Temu app, hoping to duplicate its success in China with its social e-commerce model. Temu includes discounted price, reviews, ratings, messages, sold statistics and buy now pay later options from Postpaid (NYSE: SQ) and Klarma.
To cut out the middlemen
The only real downside is delivery times can vary up to 11 days since most of the products are shipped out of China. However, the incredible price discounts are enough to justify the wait. Although critics may denigrate the quality of Chinese products, remember that China accounts for about 28.4% of the world’s production.
Consumers can actually see identical products on Amazon.com at much cheaper prices because they ship directly from the manufacturers instead of through third-party sellers who mark up the prices many times over.