Pinduoduo, Alibaba, TikTok: Battling for Low Prices and Shelf Space, Will E-commerce Ultimately Become 10x PE Retail Stocks?

Since the release of the last e-commerce overview in 3Q last year, it seems that the e-commerce industry has changed a lot. However, looking back from then until now, the trend since the "hundred billion subsidy" war seems to continue, and the valuations of various companies and the relative strengths and weaknesses among several e-commerce companies have not undergone revolutionary changes.

After the end of the first half of 24, looking back over the past half year, the current trends in the e-commerce industry are as follows:

① In terms of stock prices and valuations, JD, Alibaba, and Pinduoduo's stock price performance and valuation trends are synchronized. In the first half of 24, stock prices remained almost flat, despite different performance, PE valuation multiples for 24 have all narrowed to the range of 9x to 13x.

② In terms of business, competition among platforms around low prices and consumer experience is becoming more intense, and in the process of mutual imitation, it tends to homogenize more.

③ Perhaps due to the narrowing differences between platforms, Douyin and Pinduoduo, which lead in GMV growth rate, have apparently experienced a significant decline in GMV growth rate since 2024 according to some research. On the other hand, JD and Alibaba, which are at the bottom, seem to show a trend of bottoming out in GMV (it is uncertain whether this trend can continue). The GMV growth rates among platforms also seem to be converging.

④ The trend of changes in monetization rates is becoming more evident in influencing the performance of e-commerce platforms. Due to different positioning and business models, potential monetization rates may not be the same. However, the ranking of GMV growth rate and monetization rate levels also seems to have a clear positive correlation.

⑤ The willingness of white-label merchants to pay seems theoretically higher than that of brand merchants. Therefore, Pinduoduo's monetization rate center may be higher than that of Alibaba or JD.

⑥ The softer the overall consumption, the more obvious the relative growth advantage of online channels, so the e-commerce industry has more room and ability to improve monetization overall.

⑦ However, with the convergence of competition and GMV growth rates, while the monetization rates of various e-commerce platforms fluctuate around their respective centers, the differences may also relatively narrow.

⑧ In the short to medium term, "instant" shareholder returns are an important factor influencing fund preferences. Past buyback efforts and stock price performance are significantly positively correlated, providing solid support for e-commerce companies when stock prices/valuations are significantly low.

⑨ Until cross-border businesses achieve successful (at least preliminary) localization operations, we believe that the "noise" generated is far greater than its impact on the overall valuation of the group.

The following is the detailed content of the main text:

I. Significant differences in performance, but stock price performance tends to converge

Understanding the past can illuminate the future, and our speculation on the direction of the e-commerce industry in the second half of the year and beyond also needs to start with a review of the performance of the e-commerce sector from 24 to the present.

1. Stock price performance tends to converge

From the perspective of results: ①In terms of stock prices, the stock price performance of the 3+1 shelf-type e-commerce platforms covered by Dolphin Research, after fluctuations in the first half of 24, the three large platforms have different fundamentals and strategic tactics, but their stock prices have converged, returning to a similar level compared to the beginning of the yearHowever, somewhat surprisingly, JD.com, which is considered to have the weakest fundamentals in consensus, once took the lead during the rebound in April and May, while Pinduoduo, with the strongest performance, has been trailing behind for most of this year, ending the first half of the year still behind JD.com and Alibaba.

As for the relatively strong performer last year, the niche e-commerce platform Vipshop, it is significantly underperforming this year, with a drop of about 25% since the beginning of the year.

② In terms of valuation, from a time perspective, the "3+1" e-commerce companies have generally experienced a considerable amount of "passive valuation compression" since the beginning of the year. Referring to market expectations and our calculations, it can be seen that the overall profit growth of the three major e-commerce groups in 2024 is higher than the core business growth, mainly due to the reduction of losses in non-core businesses. However, the market value of the three companies has not advanced but regressed, reflecting that the market does not seem to care much about the reduction of losses in non-core businesses of Alibaba, JD.com, and Pinduoduo, pricing based solely on the performance of core businesses.

Looking across companies, despite the significant gap in expected profit growth rates between Pinduoduo and JD.com & Alibaba (high double digits vs. mid to low single digits), the valuations of the three major e-commerce platforms have significantly converged, mainly because Pinduoduo's overall PE and core business PE have both contracted by about 40% and 30% respectively since the beginning of the year.

This has led to, in terms of core business, the PE valuation range of the top 3 players narrowing from 10x~18x at the end of 2023 to about 9x~13x. Therefore, the market seems to believe that the differentiation (alpha) among e-commerce players is dissipating, and each player is converging towards the industry average level (beta), hence not willing to assign a higher valuation to any company (especially Pinduoduo).

2. Differential Performance

In terms of performance:

① On the revenue side, there are differences and similarities in the growth trends of each company's core business. The difference lies in Pinduoduo maintaining high double-digit growth and, despite the increasingly fierce competition in the e-commerce industry, its revenue growth in the past two quarters has not been affected, but has increased.

The similarity is that JD.com and Alibaba, after nearly no growth in the past two quarters, both rebounded to mid to high single digits in the first quarter of this year. Although it is not enough to draw a reliable conclusion based on a single quarter, it has planted the possibility that JD.com and Alibaba may have a positive growth trend after several quarters of strategic adjustments and investment in product prices and user servicesAs for Vipshop, it is showing a trend of slowing growth either due to the impact of the battle between giants or the weakness in sales of core fashion categories.

In response to the intense competition and increased investment to regain growth, JD.com and Alibaba's marketing expenses have also significantly increased in the past two quarters, with investment growth rates around 16% in both quarters. Although Pinduoduo still leads in terms of absolute expenditure growth (over 40%), the investment growth rate of Pinduoduo has been slowing down in recent quarters due to the reduced intensity of Temu's investment and the apparent shift of the main site towards a "profit-first" approach.

As a result, although JD.com and Alibaba have accelerated their growth, the cost is a low single-digit year-on-year decline in operating profit for their core retail businesses.

In summary of the above review, we believe the main focus is: although the performance may not be the same, in terms of stock price performance and valuation, Pinduoduo is clearly approaching JD.com and Alibaba, and the market's sentiment towards the three major e-commerce companies is converging.

II. Will Convergence be the Future Direction for E-commerce Companies?

After reviewing the historical stock prices and performance of companies, what are the reasons behind these results? What are the visible trends in the evolution of the e-commerce industry?

1. Endless Price Wars and Service Competition

The first trend we see is that e-commerce companies are increasingly competing fiercely and homogenizing around cost-effectiveness and consumer experience. To some extent, they have even taken some measures that may seem unreasonable to the average person.

① The first and foremost is still low prices. Although it is difficult to quantitatively analyze how much the price gap between Taobao, JD.com, and Pinduoduo has narrowed since last year, as a consumer, one can feel the importance of platforms like Taobao and JD.com in terms of hundred-billion subsidies, 9.9 free shipping, "xx" factories, and the entry of low-priced, white-label products; these days, JD.com has announced the restart of its Jingxi department, once again intending to penetrate the market.

② Lowering fulfillment thresholds and improving services, JD.com has lowered the non-member free shipping threshold to 59 yuan. For member users, JD.com and Taobao both provide unlimited free shipping and doorstep pickup; recently, Pinduoduo and Taobao also announced free shipping activities for Xinjiang and Tibet③ Refund Only: As a controversial but special feature of Pinduoduo, Alibaba and JD.com have also followed suit by offering a refund-only option for some products. Even though there is a possibility of being taken advantage of, platforms tend to please users.

④ Douyin Joins the Low-Price Battle: Despite having the largest source of traffic and leading the industry in growth rate, Douyin e-commerce recently announced plans to strengthen its focus on low-priced or white-label products. After the gradual decline of the live streaming and video model dividends, cost-effectiveness has also become an important direction for its efforts.

⑤ Pinduoduo Launches Automatic Price Adjustment: Perhaps in response to competition, it is reported that Pinduoduo recently launched the function of automatic price adjustment, which can compare prices of products across the entire network and automatically adjust the prices of some products to the lowest.

It can be seen that e-commerce platforms have entered a situation where "if others have it, I must have it too", rapidly following suit with the functions and services of their competitors, even if these measures may harm the platform itself or the interests of merchants, or may not align with their own positioning or the long-term interests of the industry. The continuous imitation among platforms will result in increasingly intense competition and homogenization.

2. The Increasingly Evident Changes and Importance of Monetization Rate

In addition to the intensifying competition and homogenization, monetization rate has become one of the most influential factors for e-commerce platforms. For example, Dolphin Research has observed from multiple channels that Taotian continues to focus on grabbing users and growth at low prices internally, and pushing up the conversion rate with the whole site as the main focus, shifting the focus back to profit. There is ongoing debate about which direction is relatively more important.

So how have the monetization rates of various e-commerce platforms actually changed? Firstly, Pinduoduo has continuously broken market expectations since the second half of 2023, mainly due to the steadily increasing monetization rate, leading to a significant growth in main site advertising revenue far exceeding market expectations. Although e-commerce companies no longer disclose GMV data, making it difficult to know the precise monetization rate, combined with research and our calculations:

① Excluding the impact of Temu on the overall monetization rate and focusing only on Pinduoduo's main site business, the average annual increase in Pinduoduo's monetization rate between 2022 and 2023 was 0.5 percentage points, and in 1Q24, the monetization rate increased by about 0.9 percentage points compared to the previous year, reaching nearly 5.4% (some other institutions have estimated it to be close to 6%), with the monetization rate accelerating in 2024.

② In comparison, according to CMR calculations, Taotian Group's monetization rate fluctuated within the range of 4.0% to 4.1% between 2021 and 2023, without a significant increase. In the first quarter of this year, possibly due to support for small and medium-sized merchants, the average monetization rate slightly decreased by about 0.2 percentage points to 3.8%.

③ As for Kuaishou and Douyin, the two main content e-commerce platforms, based on calculations from other channels, Douyin e-commerce had a total monetization rate of over 10% in the early stages of development (explosive growth phase) (mainly due to high fees paid to the hosts), but in recent years, it has been gradually decreasing, following the trend of industry standard levels; Kuaishou had a relatively low monetization rate in the early stages of development, but as the platform matured, the monetization rate has gradually increased, reaching over 4% in the first quarter of this year, which is considered a high level in the industry

Based on the different monetization trends on different platforms as mentioned above, it can be seen that the monetization rate is higher in the early stage of company development/rapid growth, and also higher in the mature stage of the platform (when the growth rate has stabilized). However, Dolphin Research believes that the underlying logic is actually the same, essentially a trade-off between profitability and growth.

① During the high-growth phase, when e-commerce platforms can bring a large number of new customer flows and sales growth above the average level to merchants, merchants are willing to pay higher promotion fees for substantial growth space, allowing the platform to enjoy a higher monetization rate (such as Douyin). At this time, the platform can also choose to "cast a long line to catch big fish" to further accelerate growth.

② In the mature stage, when the platform's growth is nearing a bottleneck and starting to slow down, it can shift towards pursuing profits, actively increasing the monetization level, and boosting revenue and profit growth. Examples of this category include Pinduoduo and Kuaishou. Alternatively, the platform can also choose to actively reduce the monetization rate to some extent to attract merchants and users back, with the intention of regaining growth. Alibaba, JD, and even Douyin fall into this category.

Therefore, when facing growth entering the mature stage, the reasons for different platforms choosing between profit or growth may lie in whether the platform's stabilized growth rate after entering the mature stage remains at a relatively high or low level, and whether the platform's fundamental barriers in its core areas are solid.

In most past e-commerce industry research, the evaluation of the strengths and weaknesses of e-commerce platforms has mostly been from the perspective of users, generally measured by the framework of "saving > variety > quality = speed" to assess the value that the platform brings to consumers. Although in the context of "supply exceeding demand," many industries in China have shifted from a "seller's market" to a "buyer's market," thus the relative importance of consumers is constantly increasing.

However, merchants are obviously an indispensable part of the e-commerce tripartite system, and for the platform, merchants are also the direct source of revenue and profit. From the perspective of merchants, what is the greatest value that e-commerce platforms bring? Dolphin Research believes that, simply put, it is to bring more suitable customers to merchants and assist merchants in obtaining the most profit, cash flow, or sales volume (the priority of different merchants' needs may vary), so merchants will be more willing to pay for it, thereby increasing the platform's monetization ability.

3. Is GMV growth rate one of the determinants of the monetization rate?

The recent ranking of GMV growth rates for top e-commerce platforms is: Douyin > Pinduoduo ≈ Kuaishou > Taotian ≈ JD, while currently the ranking of monetization rates for each platform is: Douyin > Pinduoduo > Kuaishou > Taotian > JD, indicating that the current ranking of platform monetization rates and GMV growth rates is generally consistent, showing a significant positive correlation. This to some extent verifies the simple logic that platforms that can bring more sales/revenue/profit to merchants also have higher monetization capabilitiesHowever, GMV growth rate obviously will not be the only factor affecting the platform's monetization capability. Even with a similar GMV growth rate, different business models and advantages in customer base/merchants will naturally also impact the platform's monetization capability.

4. Are white-label merchants more willing to pay?

Taking Pinduoduo as an example, when Pinduoduo's main site monetization rate reached and exceeded that of Taobao last year, there were voices in the market doubting the space for further increasing the monetization rate. After all, merchants on Pinduoduo have lower product prices and profit margins compared to brand merchants, yet they have to bear higher costs in terms of purchase volume and commission compared to brand merchants on Taobao. This seems illogical in simple terms. However, since the second half of 23, Pinduoduo's monetization rate has not only not reached a bottleneck after surpassing Taobao, but has been accelerating.

The main reason for this misjudgment, we believe, is that the priorities of different merchants are different. Let's imagine a brand merchant and a white-label merchant, and consider who is more willing to sacrifice profit to bear higher purchase costs in exchange for higher sales or revenue.

① For a mature and successful brand merchant, their demand for profit is likely to be higher than sales. For example, the ultimate pursuit of luxury brand merchants may be to maintain prices and profits, even if it means destroying inventory rather than reducing prices for promotions. Moreover, brand merchants likely have a comprehensive sales channel, such as self-operated stores and large retail stores, and online channels are not indispensable. In fact, news of brand merchants proactively announcing their withdrawal from e-commerce platforms to maintain a comprehensive pricing system is not uncommon recently.

② For white-label merchants, cash flow/sales are likely to be a higher priority. One reason is that white-label merchants face tighter cash flow pressure and need to ensure sufficient sales/revenue to cover the costs of continued production. Otherwise, regardless of profitability, the survival of the merchants becomes a question. Since white-label merchants lack brand effects and have unclear sales channels, they are more likely to rely heavily on 3P sales channels (such as e-commerce platforms).

It can be seen that white-label merchants are actually more willing to sacrifice profits, increase purchase volume to boost sales and revenue, and have a higher reliance on 3P sales channels (such as e-commerce). Therefore, we believe that Pinduoduo's positioning as mainly white-label merchants/products has given the platform a higher monetization capability, and even at a similar scale or growth rate, Pinduoduo's monetization rate is likely to be higher than JD or Alibaba.

5. Is convergence after differentiation an inevitable trend?

Although we believe that Pinduoduo's monetization capability may be higher compared to Taobao and JD horizontally. However, vertically and compared to itself, as we inferred earlier, there is a positive correlation between changes in monetization rate and GMV growth rate. This leads to a new issueAlthough there is no reliable source in the market for the growth rate of Pinduoduo's GMV, there are significant differences in estimates from various channels. According to Dolphin Research, some top institutions predict that Pinduoduo's GMV growth in the first quarter of this year is less than 25%, with expectations for the growth rate in the following quarters falling below 20%.

Combining the above, as e-commerce competition becomes more intense (especially in the low-price advantage or consumer-centric track where Pinduoduo excels), the differences between platforms are narrowing. At the same time, there are signs of recovery in GMV growth for JD.com and Alibaba in the first quarter. Although it is currently uncertain whether the counterattacks from Alibaba and JD.com are effective, and whether the institutions' judgment on Pinduoduo's GMV growth rate is accurate, we cannot provide a definitive judgment. However, based on simple logic, it is not impossible for Pinduoduo's future GMV growth rate to return to the industry average level, but rather it can be said to be reasonable. After all, as your competitors increasingly imitate you and all players become more alike, business performance is more likely to converge rather than diverge.

Therefore, although we are not sure if Pinduoduo's current monetization rate has reached its higher central level, if GMV growth returns, it at least means that the monetization rate cannot significantly deviate from its own level. And when both GMV and monetization rate growth return to normal, the valuation trends of various e-commerce companies will naturally align.

6. Boosting confidence in monetization—Is the superiority of online channels more evident?

Although different platforms have different growth rates in monetization rates, we believe that there is potential for further overall improvement in the central monetization rate in the entire e-commerce industry.

On the one hand, after Pinduoduo, companies like Alibaba and Kuaishou are also promoting tools such as full-site push advertising, which indirectly helps platforms strengthen their control over the ratio of free/paid traffic and helps increase the proportion of paying merchants (after other merchants use full-site push, the traffic of traditional tools or non-paying merchants passively decreases). According to research, after Pinduoduo, the proportion of free traffic is still above 50% as of the first quarter of this year, and the company is expected to further increase the proportion of paid traffic. Full-site push-type promotion tools provide a tool foundation for platforms to improve monetization rates in the future.

From an industry perspective, the growth rate of domestic social retail in the first quarter was 4.7%, further declining to 2%~3% in March-May. In contrast, the growth rate of online physical retail in the first quarter was as high as 11.6%, far ahead of the overall social retail growth rate, with growth rates in April-May still close to 10% or higher. The proportion of online physical retail in overall social retail, after being temporarily impacted during the offline recovery last year, has been steadily increasing again this year, with a year-on-year increase of about 2 percentage pointsAs overall consumer spending becomes more subdued, the relative growth advantage of online channels becomes more prominent. As other channels find it increasingly difficult to sell goods, the value and scarcity of online channels as one of the few channels that can more easily sell goods to merchants become more apparent. Due to this scarcity, e-commerce platforms' ability to monetize for merchants has also increased significantly. In other words, as long as the relative growth advantage of online channels can be maintained, online channels have the confidence to increase monetization rates.

III. Besides the endless internal competition in China, what other highlights are there

4. Shareholder Returns, Equally (More) Important

In the first part of this article, it can be seen from the performance of JD's stock price leading the e-commerce industry in the past six months that, under the current overall low valuation, the performance of e-commerce company stock prices is not necessarily dependent on fundamentals. In fact, the abundance of "real-time" shareholder returns has become a very important factor affecting short to medium-term stock performance.

It can be observed that both JD and Alibaba significantly increased their buyback efforts in the first quarter of 2024, especially JD, with the single-quarter buyback amount in 1Q24 exceeding the total buyback amount of any previous year. While Vipshop, after its generous buybacks in 2022-23, significantly reduced its buybacks in the first quarter of this year, almost to zero. As for Pinduoduo, it did not engage in any buybacks at all.

From this, the ranking of buyback efforts is: JD > Alibaba > Vipshop > Pinduoduo, which is roughly related to the stock price ranking in the first half of this year. This validates the market's emphasis on real-time shareholder returns.

Looking ahead, it can be seen that Alibaba currently has the most abundant unused buyback quota, accounting for approximately 16% of its total market value, while JD and Vipshop each account for around 7% of their respective market values (and the possibility of further increasing the buyback quota cannot be ruled out). From this perspective, whenever the valuations of companies like JD, Alibaba, and Vipshop fall to levels that the companies consider significantly undervalued, the companies have buybacks as a strong support to protect investors from downside risks. In other words, investors do not need to worry too much about the downside risks of e-commerce targets, but rather focus more on the probability and potential upside.

However, in order to meet the foreign exchange fund pressure brought by buybacks, JD and Alibaba recently announced the issuance of convertible bonds, which has somewhat reduced the attractiveness of buybacks and lowered investors' favorability towards the companies. For specific details, please refer to our separate discussion, and we will not delve into it here5. Initial success in going global, but is cross-border model just a process, with localization as the ultimate goal?

In addition to its core domestic business, the recent trend of e-commerce platforms going global has been gaining momentum. However, the market's enthusiasm for this is not as fervent as it was when Temu started 23 years ago. Looking at recent performance, Alibaba's international group has maintained a revenue growth rate of over 40% for the past 4 quarters. According to our calculations, the revenue contribution from Temu in the latest quarter has accounted for over 30% of Pinduoduo's total revenue. It is evident that the overseas business has already shown promising results in creating new growth opportunities for the group, but the market's response based on the performance of related company stocks does not seem to be enthusiastic.

On one hand, the underperformance of the domestic business is still suppressing the overall valuation of the group. However, as we mentioned earlier in our discussion on cross-border e-commerce business, there are several issues to consider:

① On one hand, cross-border e-commerce is subject to regulation by foreign governments, and it is almost certain that it will face suppression, a matter of when rather than if. Following the "Tiktok" incident that raised concerns in the market about Chinese companies expanding into the United States, the recent positioning of Temu as a "super large online platform" by the European Union indicates that Temu may attract more attention from regulatory authorities in the future.

② On the other hand, with Amazon launching semi-hosted services in China, attempting to expand its sources of low-priced goods in China and accelerate cross-border fulfillment speed through Amazon's globally leading proprietary logistics. To some extent, apart from pricing still being controlled by merchants, there is no significant difference from Temu's model. Although we cannot determine whether Amazon will invest heavily in this business, for domestic cross-border e-commerce, at least there is a potential strong competitor. This also confirms our previous speculation: the abundance of low-priced sources in China does not constitute an insurmountable barrier or advantage, as overseas platforms can also have a large number of domestic sources. Control over overseas customer sources is crucial for cross-border platforms.

③ Correspondingly, we believe that for cross-border e-commerce to truly succeed and realize the vision of creating another "xx", breaking away from the "cross-border" restrictions on customer groups and product categories, achieving localization of sources and operations is the only way for cross-border e-commerce to make a breakthrough.

In response to this, Temu has cleverly launched a semi-hosted model, by absorbing inventory goods that cross-border merchants have already transported to overseas locations, to break the category restrictions of small parcel direct shipping and further improve fulfillment efficiency. However, a new problem arises: how large is the remaining inventory volume of overseas merchants? Compared to local channels, what unique value can Temu provide to merchants capable of completing cross-border transportation on their own? Therefore, we believe that Temu's current adoption of the semi-hosted model with existing overseas inventory is just a temporary measure, or a trial operation phase.To follow up with the localization transformation, it may be unavoidable to establish a transit warehouse model. Therefore, the heavier and higher operating costs, as well as how to compete with overseas local channels, may be an unavoidable issue.

Therefore, for overseas business, Longqiao Dolphin Research still maintains its previous viewpoint. Only when the current cross-border business completes the initial localization transformation and proves its ability to positively respond to overseas local channels, will it be the time when the overseas business can truly impact the overall valuation of the group.

Longqiao Dolphin Research's Past Related Studies:

E-commerce Industry

October 10, 2023 - "Against the Wind, Can Alibaba, JD.com, Meituan Turn the Tables?"

April 12, 2023 - "Fighting for Cost-Effectiveness, Can Alibaba, JD.com, Pinduoduo Stop the Internal Competition?"

January 5, 2023 - "Reversal of Attack and Defense, Can Alibaba, Ctrip, Didi Fight Back?"

September 30, 2022 - "Pinduoduo vs. Vipshop: Your 'Hard Times' Are Their 'Good Times'?"

September 22, 2022 - "Alibaba, Meituan, JD.com, Pinduoduo: Have They Resigned Themselves? Still Need to Strive for 'Great Fortune'?"

April 27, 2022 - "Alibaba vs. Pinduoduo: After the Battle, Only Coexistence?"

April 22, 2022 - "Meituan, JD.com, Why Are They Outstanding in the Stockpile Battle?"

April 13, 2022 - "As the Cycle 'Decays,' How Much Value Do Alibaba and Tencent Still Have?"

Risk disclosure and statement of this article: Dolphin Research Disclaimer and General Disclosure