Breakingviews – Pinduoduo is stunned by its own store hype

HONG KONG (Reuters Breakingviews) – Pinduoduo is stifled by its own shopping hype. Investors withdrew $ 16 billion in market value from the Chinese company because orders on their e-commerce app were disappointed. The problem revolves around the “gross market value”, a confusing metric and more so as consumer sentiment is volatile. New boss Chen Lei has given an expensive lesson in why hard numbers rule.

After more than doubling this year, China’s e-commerce shares plummeted darling by about 14% after the company released its quarterly financial results on Friday. At 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, the adjusted net loss was significantly reduced, to $ 11 million, suggesting that marketing and promotional costs be monitored.

None of this compensated for a sudden fear that Pinduoduo’s meteoric growth might come to an end. GMV, the value of orders placed on the app, for the quarter increased 48% year-on-year, nearly half the annual rate in 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 pages of this year’s so-called 6.18 event.

The bigger problem is GMV itself, which does not say much about the business model of the company to account for advertising in particular. It is not a legally accepted accounting term, and definitions may differ across companies. Pinduoduos include all placed orders, regardless of whether they are actually sold, delivered or returned. The pandemic has shown how this can be misleading: the company effectively acknowledged that its GMV was inflated in the first quarter, as many consumers were advised to place orders on items such as medical masks, in order to cancel them later.

GMV has engaged in regulatory oversight in the past. Alibaba has stopped disclosing such quarterly figures and is being investigated by the U.S. Securities and Exchange Commission for accounting practices, including its reporting of management data from its annual retail festival. The latest sell-off is an expensive lesson for Chen, and investors, to shift focus to other cleaner and more reliable figures.