Shares of Chinese e-commerce giant PDD Holdings (PDD) have swiftly recovered after a challenging Q2 report in August, coinciding with China’s substantial economic stimulus announcement. This development alleviated some pessimism around macroeconomic headwinds impacting revenue growth. As a result, I am adopting a Buy position on PDD. Despite a 70% surge since late August, the stock remains attractively valued relative to projected growth over the next few years, suggesting there is still upside potential following China’s stimulus-driven surge.
In this article, I’ll outline PDD’s recent developments and explain why shares could still move higher for those who may still be interested in joining the rally.
Overview of PDD Holdings’ Business
Before discussing PDD Holdings’ recent stock rebound, it’s helpful to provide some context. PDD Holdings operates both the Pinduoduo e-commerce platform and the Temu online marketplace, standing alongside Alibaba (BABA) and JD.com (JD) as among the largest e-commerce companies in China.
PDD initially differentiated itself from other e-commerce platforms with a team-based purchase model and exclusive access to mass consumers through a partnership with WeChat, China’s largest social media app. In recent years, the company has undergone several strategic shifts, evolving from a merchant-centric model to a consumer-focused one, and from an advertising-driven platform to a full-service ecosystem. However, many merchants perceive PDD as more of an inventory liquidation channel than a full-price platform, unlike Alibaba. This positions PDD as a kind of online, off-price e-commerce retailer in China.
Despite the high execution risks associated with these strategic shifts, PDD’s management has performed well and expanded rapidly. Over the past five years, the company has achieved an impressive top-line compound annual growth rate (CAGR) of approximately 75%, along with a levered free cash flow CAGR of ~100%, aligning growth with operational efficiency.
How PDD Holdings is Performing Amid Chinese Consumer Headwinds
A major risk for my positive outlook on PDD Holdings is the notable weakness in China’s economy. In August, PDD reported earnings that missed revenue consensus estimates of $14.04 billion, coming in at $13.35 billion. Despite representing an 86% year-over-year increase, the market reacted negatively, resulting in a 28.5% drop in the stock during the following trading session.
The company’s earnings call also carried a negative tone. Co-CEO Chen Lei made it clear that revenue growth would face challenges in the coming quarters, stating:
“We are seeing many new challenges ahead, from changing consumer demand, intensifying competition, and uncertainties in the global environment.”
In addition to China’s macroeconomic struggles, PDD faces political risks related to its international market expansion with its Temu brand. The company warned that its operations could be “materially and adversely affected” if de minimis trade loopholes were closed, or if current tariff exemptions were removed.
How China’s Stimulus Plans Have Changed the Landscape
A significant turnaround in the investment thesis for PDD Holdings—and Chinese stocks in general—came sooner than expected. Beijing surprised markets by announcing a series of stimulus measures, including the largest interest rate cuts in the country’s history, support for the troubled property sector, cash assistance for residents facing difficulties, and additional social security benefits. These actions alleviated concerns about consumer and internet stocks. Since hitting their yearly lows of under $90 per share on August 28, PDD shares have surged by over 70% in just over a month.
As the vast majority of PDD’s revenues are generated in China, any gains in top-line growth from the stimulus measures will likely translate into increased profits for the company. Given that PDD has healthy margins, with gross margins of 65.2% and operating margins at 33.5% reported last quarter, this incremental demand should further enhance the company’s profitability and serve as a significant tailwind for its stock.
Are PDD’s Valuations Still Attractive?
The key question, given recent events, is whether it is still worth buying PDD stock at its current valuations. In my opinion, it is. Despite the recent strong appreciation in share price, valuations remain attractive when considering the new fundamental catalysts and adjusting current multiples for growth projections.
The stock trades at a forward P/E of 12.8x, which is about 25% below the industry average. Additionally, analysts expect PDD to grow EPS at a CAGR of 26.7% over the next three to five years. This, combined with the current forward P/E, results in a very discounted forward price-to-earnings-to-growth (PEG) ratio of 0.48x. Remember that generally a PEG below 1x indicates that the share price is “cheap” relative to expected growth.
Under this metric, PDD appears significantly cheaper, though not necessarily undervalued compared to its main Chinese peers, with Alibaba and JD.com trading at forward PEG ratios of 1.3x and 0.9x, respectively.
Is PDD A Buy, According to Wall Street Analysts?
According to the Wall Street analysts’ consensus at TipRanks, PDD is rated as a Strong Buy, with 12 out of 14 analysts recommending a Buy and the other 2 suggesting a Hold. The average PDD price target is $163.45, indicating an upside potential of about 7%.
Conclusion
The investment thesis for PDD Holdings has entered a new phase, as recent stimulus measures in the Chinese economy are expected to create incremental demand for internet stocks, reinforcing my Buy stance on the stock. This development counters skepticism regarding weak consumer spending and raises hopes for a resurgence of growth in the coming quarters.
Despite the recent rise in shares reflecting this fundamental catalyst, PDD stock still trades at significantly discounted valuation multiples when considering long-term growth projections. I believe there is potential for further upside. It may not be too late to join the rally.
