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Shares drop as Pinduoduo reports recent losses

Pinduoduo shares dropped 17 percent after the company reported wider-than-expected losses in the fourth quarter, despite revenue increasing three fold. 

Pinduoduo shares dropped 17 percent after the company reported wider-than-expected losses in the fourth quarter, despite revenue increasing more than three times to US$822.3 million.

The Shanghai-headquartered e-commerce site reported 2.4 billion yuan ($358 million) in losses compared with a small profit a year earlier.

The NASDAQ-listed company is still 32 percent up from its IPO price of US$19, despite the 17 percent drop on Wednesday, the biggest intra-day drop since its listing in July last year.

UBS Securities put a target price of US$37 on its shares in a research report last week, and estimate that Pinduoduo's active buyers will catch up with Alibaba's current 636 million user base in three years, as the site is best positioned to benefit from growth of late adopters in the China Internet space.

The higher cost of revenue was due to increased spending for cloud services, the call center and merchant support services.

Average monthly users almost doubled in the fourth quarter to 272.6 million, while the number of active buyers at the end of December was 418.5 million.

"The picking up of gross merchandise volume in the last 12 months was driven by rapid growth in our annual active buyer base and a near doubling of annual spending per active buyer. We view this as an indication of users’ growing trust in our platform," founder and CEO Huang Zheng said in the earnings release.

He told an earnings conference that they were not hurrying to monetize because they still seek to show the platform's value, and that they remain confident in the unleashed consumer demand. As the online shopping landscape evolves, Chinese manufacturers will have a better chance to build up their own brands, he believes.

The company competes with market leaders Alibaba and JD.com and targets those who are not familiarized with online shopping, such as the elderly and those in lower tier cities, but there are also worries that growth may not be sustainable once it stops subsidizing shoppers and merchants.

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