Of course, there is a slim possibility that Pinduoduo's share price will hit a new high in April 2020.

Pinduoduo (PDD. US)'s roller coaster share price over the past week has made investors love and hate it. Pinduoduo's share price soared 70 per cent after the Q2 results were released in August, but withdrew quickly within a week of the Q3 results. What is the impact of such market capitalization fluctuations on Pinduoduo? whether this stock is still a choice with ultra-high growth potential for investors? from the logic of value investment, through the analysis of technical damage, try to get investors back to the rational track.

Fundamentals:The collapse in share prices was due to lower-than-expected revenue growth.

According to the Q3 financial report, Pinduoduo's income for the quarter was $1.0526 billion, even though that figure still reached triple-digit year-on-year growth (115%), but it was nearly $20 million less than Wall Street's expected figure of $1.07 billion.

Slower-than-expected growth led to an extreme rise in pessimism, and share prices tumbled 15 per cent.

However, the triple-digit growth rate still shows the momentum of Pinduoduo's rapid growth, and we expect Pinduoduo's income growth to remain strong in fiscal year 2020, but looking at the future, the company has shown signs of deceleration.

Pinduoduo's record trading volume in the US stock market this week reflects that many funds are locking in expected profits and are expected to encounter greater short pressure if the stock price returns to $39 or higher. Pinduoduo's current sharp rebound can provide great trading opportunities.

Model derivation:The concrete presentation of Pinduoduo's revenue deceleration

A long time ago, we spoke to JD.com (JD. US) market capitalization research report, discussed Pinduoduo (PDD. US), which has risen 135% since its June low, has begun to crowd out.

Even if the Q2 earnings performance does far exceed market expectations, we do not think it will directly bring a valuation increase of $20 billion to the company, which is more driven by trend investment. Facts have proved that once investors' enthusiasm for Pinduoduo investment begins to fade, the "castle in the air" will collapse quickly.

We forecast Pinduo's annualized earnings per share (AEPS, see table below), and the results show that the company will be profitable in fiscal year 2020. In fiscal year 2019, it is estimated that the final EPS will be a net loss of 46 U.S. dollars per share, as of Q2 data, Pinduoduo's 2020 fiscal year AEPS will reach 32 cents.

If the forecast is accurate, it means a lot to Pinduoduo, because the vast majority of Chinese companies in the US IPO struggle to reach a profitable level in the first five years.

This also explains why Wall Street analysts give very high estimates of Q3 revenue, and once lower than expected, the negative impact of this forecast will be in many ways.

Here we bring the lower-than-expected Q3 results into the model as a negative factor, and the earnings estimates are significantly reduced. The estimate for fiscal year 2020 has been reduced from 58 cents to 32 cents, or nearly half. The estimate for fiscal year 2021 was lowered from $1.32 to $1.29.

It can be seen that even as a negative amendment does not cause huge problems to expectations, Pinduoduo still has the ability to make a profit in fiscal year 2020. This also means that Pinduoduo, who plummeted from a rational point of view, actually provided an excellent opportunity to enter.

One of the catalysts for ups and downs in our estimates is the decline in revenue costs, which increases sequentially from 200 basis points to 24 per cent. This is based on the fact that the revenue cost of Q1 in 2019 is 19%, while that of Q2 in 2019 is 22%. Therefore, although the performance of income growth at the triple-digit level is amazing, the simultaneous rise in income-generating costs must not be ignored.

Although revenue in the Q3 financial report increased by 117% compared with the same period last year, revenue and cost increased by 136%. David Liu, vice president of strategy for Pinduoduo, pointed out in a conference call that the company's long-term growth strategy is still about market share rather than cash. The reason for adopting this strategy is that Pinduoduo is convinced that user growth and good retention will eventually allow the company to make money. It's all right logically in the long run, but the company's profitability may be constrained in the short term.

In terms of user growth, the "10 billion subsidy" strategy of Puduo has indeed achieved remarkable results, with the average number of monthly active users growing by 85% to 429.6 million since the third quarter of 2018; the growth rate of active buyers is less than half of the average number of monthly active users, but 39% is also a very good number.

On the other hand, the stickiness of Pinduoduo buyers also seems to be increasing, and the annual consumption of each active buyer has increased for nine consecutive quarters. From this point of view, the annual consumption of Puduo buyers is getting closer to that of Amazon.Com Inc. US) distance.

Pinduoduo has dropped from a growth rate of more than 1000% in 2018 to three digits, and the rapid decline in growth rate has attracted our attention. In mainstream Wall Street expectations, that number will soon fall to 90% Mel 100%, and even more than one investment agency is continuing to lower it.

Revenue estimates for 2019 have fallen from $1.62 billion to $1.58 billion, meaning growth of 92% in the same year, with a significant deceleration of basis points.

In our model, the deceleration effect will be more obvious, and we expect Pinduoduo's income growth rates of Q1 in 2020 and Q2 in 2020 to be 67% and 55% respectively. Although "deceleration" itself is not against the law of enterprise development, but from the historical fluctuations of stock prices, "deceleration" is a very sensitive word for investors, and the adverse effects are beyond the normal range.

The blue line in the following figure represents the quarterly growth rate, while the white line represents an average of 2/4. We chose the average income growth rate of 2/4 to achieve a more stable analysis.

From the chart, we can see that not only the quarterly income growth rate, but also the 2/4 income growth rate is declining significantly. This shows that the deceleration occurs not only in Q1Magi Q2, where sales growth is relatively low, but also in Q3Magi Q4, which is on an upward trend.

Based on this, we determine that Pinduoduo is likely to be in the transition from ultra-high growth stocks to strong growth stocks, which usually have much lower valuation multiples.

If the stock price returns to its peak as expected by investors, 2019Q4's revenue will reach at least $1.62 billion and 2020Q1's revenue will reach $1.15 billion. Both figures are higher than we predicted, meaning that Pinduoduo's share price will not exceed its all-time high of $45.50 in the next six months.

Stock price fluctuations:Two new barrier lines

Technically, the sharp volatility in share prices last week will cause some negative turmoil to Pinduoduo's overall performance in 2019. In the past, the stock did not have enough Resistance level and Momentum support, which are also the reasons why it can soar after the Q2 earnings report, just like the Mustang without reins.

But at present, Pinduoduo is facing two new barrier lines, the weaker one is $39.90 and the stronger one is $44.30. Unless it can recover the share price of $39.9 on a weekly closing basis, the rest of the price we will think of as just noise to establish a regular rebound within the new share price range.

Therefore, in the next six months, Pinduoduo is very suitable for frequent trading, it will only get strong support around $28.80 and encounter resistance around $40.

Pinduoduo's current earnings estimate is declining, and the visual income growth rate will slow down accordingly. In our view, this is not a good sign for any growth stock, and the overall performance of the stock price is very likely to go into reverse until the company meets its expected growth rate. Once the transition to strong growth stocks is completed, Pinduoduo is likely to occupy a weight in the medium-term stocks (4-6 months).

Of course, there is a slim possibility that Pinduoduo's share price will hit a new high in April 2020.