Shares of the Chinese e-commerce innovator, PDD Holdings—formerly Pinduoduo and the parent company of Temu—experienced a significant 25.4% drop in August, as per data from S&P Global Market Intelligence.
In late August, PDD Holdings disclosed its earnings for the second quarter. Although the results indicated impressive growth and heightened profitability, the company’s management cautioned about a potential slowdown and diminishing margins in the future.
“We see many challenges ahead”
During the quarter, PDD Holdings achieved an 86% increase in revenue, reaching $13.4 billion, with adjusted (non-GAAP) earnings per American Depository Share soaring by 122% to $3.20. Despite surpassing analyst predictions on the bottom line, the 86% revenue growth slightly missed expectations.
However, it was likely the management’s forward-looking statements that unnerved investors, despite the “mixed” earnings report. Co-CEO Lei Chen mentioned in the release that the company anticipates “many challenges ahead,” including intensified competition within China and other regions, as well as “external challenges,” likely alluding to macroeconomic weaknesses in China and possibly other areas as consumers reduce their spending on goods.
Chen also highlighted that Temu is set to embark on a “new investment phase,” focused on enhancing the quality of merchants on its platform, while eliminating low-quality merchants and fraudulent activities. Notably, the U.S. Consumer Product Safety Commission (CPSC) recently initiated an investigation into Temu, owned by PDD, and Shein, another Chinese rival, concerning product safety. It is possible that management foresaw this development and plans to allocate resources to monitor its third-party sellers more effectively.
The prospect of discounting to fend off competition, coupled with increased expenditure, understandably led to a decline in the company’s shares.
An Incredibly Cheap Stock, Typical of China
Following its August decline, PDD Holdings now trades at a P/E ratio of just under 10, an exceptionally low multiple for a company that recently achieved 86% revenue growth. Furthermore, PDD Holdings boasts a substantial cash reserve on its balance sheet, approximately $47 billion, with minimal debt—remarkably constituting over one-third of its market cap.
While PDD’s margins are likely to decrease from the current 33.5%, and revenue growth should decelerate from the 86% pace of the last quarter, the stock remains extremely undervalued relative to its growth. This holds true even with conservative forecasts, within a Chinese stock market characterized by notably low multiples.
Despite the clear economic and geopolitical risks associated with investing in China, for those prepared to take the leap, PDD Holdings should be a top consideration.
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