When companies change tracks or re-focus the track, there will always be "transformation wear and tear". Whether it is for the sake of re-showing consumers in a new track, or the run-in of upstream and downstream supply chains, or even the cultivation of management teams, it will affect the financial performance of enterprises.
There are many such companies, especially in the current consumer Internet field in the mainland. The market is gradually saturated, the industry is thinking about how to find the "second curve", and at this time, companies are facing a slowdown in revenue, facing the risk of profit dilution or even loss. This abounds in the financial reports of Chinese stocks in several quarters, the greater the transformation pressure, the more unstable the financial performance, the more unpredictable the potential risks, to some extent, this is also an important reason for the current decline in the valuation of Chinese stocks.
The same is true of Pinduoduo, after focusing on agriculture, the market has also had a relatively negative evaluation of it, such as the greater the intensity of agricultural subsidies (including flow subsidies and cash subsidies), the high probability will affect the commercialization process, that is, focusing on agriculture is likely to become the "transformation loss" of Pinduoduo.
Now that pinduoduo has focused on agriculture for more than two years, we should review and examine the efficiency and wear and tear of enterprises after focusing on agriculture in this process.
As mentioned above, after focusing on agriculture, Pinduoduo should reduce fees and profits to farmers, such as the policy of 0 commission for agricultural products, according to relevant media disclosures, citrus oranges sold more than 4.5 million catties on the first day of the double twelve Pinduoduo subsidy policy in 2021.
We also know that the online sales of mainland agricultural products have always had the dual characteristics of "high loss" and "low gross profit", which is also the main reason why the upward trend of agricultural products lags behind the development of e-commerce, in order to stimulate the cohesion of the platform in farmers, the platform needs to make profits to stimulate farmers' confidence, although Pinduoduo did not disclose the subsidy data under the above sales scale, but in theory it should be a larger number, then the accumulation in the past two years may have a great disturbance to the total income.
Is this really the case?
We first counted the fit of Pinduoduo GMV and marketing revenue (because the commission income includes new business represented by Duoduoduo, which is more disruptive, so it is excluded), see the figure below
From the data performance point of view, in the quarters of 2020, the dot distribution began to move below the fitting line, that is, the monetization rate of Pinduoduo's marketing revenue in the current quarters was narrowed (after 2021, we did not count the quarterly GMV and marketing, only the annual data, that is, the rightmost point).
We can make the following assumptions about this:
1. Under the epidemic situation in 2020, Pinduoduo has subsidized merchants including traffic support, which will naturally affect the monetization rate;
2. At that time, Pinduoduo was increasing its support for the upward movement of agricultural products, and the support for unique industries may be accompanied by a long period of time, after all, the current upward trend of agricultural products in the mainland is in the early stage of development, and the platform needs to subsidize the industry in the form of long-term and sustained profits.
In the chart above, we can see that the dot distribution in Q4 2020 and 2021 has begun to move up again, which is a bit strange, since subsidies for agricultural products are continuous, how can the monetization rate have this problem?
After thinking about it, we will fit the marketing revenue with the scale of the MAU, which means that in a growing platform system, if the scale and brand effect of the platform can play an effect, it will improve the advertising premium ability of the platform, that is, the premium of the platform will hedge the subsidy loss of agricultural products.
As we assume consistency, in the middle of several quarters, the dotted distribution quickly moved below the fitting line, mainly from the end of 2019 to the end of 2020, that is, after Pinduoduo positioned agricultural products, which also shows that the subsidies to merchants under the epidemic and the "focus repositioning" have indeed caused interference with Pinduoduo's revenue, and the vigilance of the market mentioned in the opening paragraph is indeed there.
After 2021, the dot distribution has moved up again, that is, the value of a single user of Pinduoduo is getting higher and higher, and merchants are willing to pay higher marketing costs.
Combining the upper and lower charts, we have found a new situation: when individual users are becoming more and more valuable, the total marketing monetization rate of Pinduoduo in 2021 is still maintained at an average level for many years, what is the reason for this?
We believe there are several reasons for this:
First, the growth of GMV exceeds the growth rate of the user's premium ability to rise, although the individual users are becoming more and more valuable, but the platform has also generated greater sales, which has not increased the burden on the overall merchant;
Second, in this cycle, there are also platform upgrades in parallel with the focus on agriculture, and Pinduoduo is also introducing new brand merchants, which will dilute the impact of subsidies on agriculture and ultimately achieve the improvement of platform premium capabilities.
The above two reasons are possible, if a sentence is summarized, Pinduoduo is indeed subsidizing agricultural products, but the normal upgrade work of the platform has effectively compensated for the loss of this part and achieved a smooth transition of overall earnings.
In the previous article, we understood that the premium ability of a single user of Pinduoduo is improved, but on the other hand, we have to think about the main market prosperity value of Pinduoduo in the past: 1. The rapid growth of users; 2. The improvement of user premium capabilities. As a platform with a MAU of 733 million, it is inevitable that the user growth rate will slow down, so when the user growth rate slows down, is the model of our above analysis still valid?
If the success of agricultural product support in the previous stage lies in its reliance on a platform for rapid growth, whether the subsidy for agricultural products in the next stage can maintain this achievement may be a more important question than the test of the advantages and disadvantages of the previous stage.
In the Q4 and full-year financial reports of 2021, the return of corporate profits has attracted the attention of the market, and the contraction of market fees has made the view of "saving market fees to ensure profitability" very popular, and I myself held the same view when I first read the financial report.
To objectively evaluate the impact of market expense cuts on profitability, we have produced the chart below
As of the middle of 2019, the proportion of marketing expenses and operating profits have maintained a close relationship, the two lines are almost absolutely negative correlation, marketing expenses contraction will be reflected in the improvement of operating profits, this stage can also be said to improve the loss is mainly from the marketing expenses saved.
After 2020, the correlation between the two lines is getting weaker and weaker, which is manifested in the improvement of operating profits is much greater than the contraction of market expenses, and the left and right axes are different in magnitude (especially after 2021, this trend is accelerated), which shows that after 2021, in addition to market costs, Pinduoduo has other channels to improve profitability.
The transformation of the business model, such as in a period of time to make up for the lack of platform SKU, Pinduoduo has taken self-operation to improve the user experience, which was a last resort at the beginning, with the upgrading of the platform and the promotion of investment promotion, especially after the "two choices", the platform does not have the necessity of self-operation, the adjustment of the model directly affects the quality of operation, which is also an important reason for the continuous improvement of gross profit margin in recent quarters.
Although the slowdown in the growth rate of the total size of users is inevitable, the transformation of business models and the sustainability of the improvement of platform premium capabilities can effectively reduce the pressure on agricultural subsidies.
In order to objectively verify the above conclusions, we also fitted MAU with the current Marketing Expenses of Pinduoduo, so as to judge that if the market expenses decline, it will not affect the fundamentals of user scale, see the figure below
In the chart above, it is clear that in recent quarters, the dot distribution has been moving downwards, which means that the cost pressure of individual users on market fees is weakening, and if this trend can continue, there will still be a large improvement range for market fees.
After the above analysis, we can summarize Pinduoduo after focusing on agricultural products as follows:
First, the adjustment of the strategy in the early stage of transformation does have an impact on the enterprise, and the "transformation loss" mentioned in the opening chapter, but with the improvement of the quality of business operation, the favorable side of the enterprise can hedge the above risks, which is also the transformation of a growth enterprise can rely on speed to "break through" the short-term negative impact;
Second, with the adjustment of the business model, the platform also has the ability to continue to reduce costs and stabilize profit margins, which lays the foundation for a sustained agricultural product strategy.
Next, we will explore the relationship between Pinduoduo's market capitalization and the above analysis.
The above figure is the price-to-sales ratio of Pinduoduo, it is worth noting that the current market value is at the level of the first half of 2020, but the price-to-sales ratio is at a historical low, and when we compare the quarterly data, the price-to-sales ratio reaches its peak by Q2 of 2020, and then although the market value peaks in early 2021, the contraction of the price-to-sales ratio has already begun.
When we discuss factors such as the decline in stock prices in 2021, we always summarize the factors specific to the industry, but in our observation, we think that there is another reason: in addition to the reasons specific to Chinese stocks, the capital market's perception of companies has essentially begun to reverse.
During the time window of transformation, the valuation of enterprises will have a greater impact, which is also another manifestation of the "transformation loss" mentioned in the opening paragraph, and the market needs to continue and dynamically look at the quality and prospects of enterprises.
In this way, we can summarize the future market value of Pinduoduo as follows:
First, the upward trend of agricultural products is the need for sustained investment and support, the potential and growth of this category do not need to be repeated, we need to emphasize that the future of this business, whether profitable or growth, will be the "second curve" of Pinduoduo, at the beginning of entrepreneurship, the cultivation of the "second curve" is conducive to the stability of future market value;
Second, the current capital market for Pinduoduo is turning to the quality of revenue, which also requires enterprises to have the ability to protect profits, in the past development has also proved that the adjustment of business model and the growth of user scale have the possibility of profit protection, which is also the key to short-term Pinduoduo market value management, and then maintain the trend of profitability in 2021 is the cornerstone of Pinduoduo's market value.
From our above analysis, we believe that Pinduoduo has roughly come out of the first stage of "transformation and wear and tear", although it has experienced external doubts and speculations, but relying on the early growth has finally passed smoothly, in the "second stage", the upward trend of agricultural products should be accompanied by investment in research and development (Pinduoduo has been tried in some industrial bases), as well as infrastructure investment (the expansion of fixed assets has been an important manifestation of Pinduoduo in the near future), and when there is still growth inertia in the previous stage, it is necessary to undergo the "second extreme" The test is of great benefit, and the great should not be taken lightly.