HONG KONG (Reuters Breakingviews) - Pinduoduo gets stung by its own shopping hype. Investors erased $16 billion in market value from the Chinese company as orders on its e-commerce app disappointed. The problem revolves around its “gross merchandise value”, a confusing metric and more so when consumer sentiment is volatile. New boss Chen Lei has had a costly lesson in why hard numbers rule.
After more than doubling this year, the New York-listed shares of China’s e-commerce darling plunged about 14% after the company released its quarterly financial results on Friday. On first glance, the five-year old Pinduoduo is getting stronger. Revenue in the three months to June increased by more than two-thirds from a year earlier, to a better-than-expected $1.7 billion. More importantly, its adjusted net loss narrowed significantly, to $11 million, suggesting marketing and promotional expenses are being kept in check.
None of that offset a sudden fear that Pinduoduo’s meteoric growth may be coming to an end. GMV, the value of orders placed on the app, for the quarter increased 48% year-on-year, nearly half the annual pace during the previous three months. What’s more, June is typically a busy month for China’s e-commerce outfits thanks to a popular summer shopping festival. Rivals Alibaba and JD.com recorded record transactions on their respective sites from this year’s so-called 6.18 event.
The bigger problem is GMV itself, which says little about the company’s business model of mainly charging for advertising. It’s not a legally accepted accounting term, and definitions can vary across companies. Pinduoduo’s includes all orders placed, regardless of whether they are actually sold, delivered or returned. The pandemic has shown how that can be misleading: the company effectively admitted that its GMV in the first quarter was inflated, as many consumers rushed to place orders on items like medical masks, only to later cancel them.
GMV has attracted regulatory scrutiny in the past. Alibaba has stopped disclosing such quarterly figures and is under investigation by the U.S. Securities and Exchange Commission for accounting practices, including its reporting of operating data from its annual shopping festival. The latest sell-off is pricey lesson for Chen, and investors, to shift focus to other cleaner and more reliable numbers.
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