1 Growth Stock Down 60% to Buy Right Now

Pinduoduo's (PDD -1.13%) stock price plunged 14% on March 20 after it posted its fourth-quarter earnings report. The Chinese e-commerce company's revenue rose 46% year over year to 39.82 billion yuan ($5.77 billion), but that missed analysts' estimates by $140 million. Its adjusted earnings per ADS increased 42% to 8.34 yuan ($1.21) per share, which also missed the consensus forecast by $0.03.

For the full year, Pinduoduo's revenue grew 39% to 130.56 billion yuan ($18.93 billion) -- decelerating from its 58% growth in 2021 -- but its adjusted earnings per ADS nearly tripled to 27.45 yuan ($3.98) per share. Those growth rates look impressive, yet Pinduoduo still trades more than 60% below its all-time high from February 2021. Let's see why Pinduoduo's stock tumbled -- and why I believe it's still a great growth stock for investors who can tune out the near-term noise.

Image source: Getty Images.

Pinduoduo is still one of the world's fastest-growing e-commerce companies

Pinduoduo is China's third-largest e-commerce company in terms of revenue after Alibaba (BABA 0.20%) and JD.com (JD -1.18%). But it's also growing much faster than both of its rivals.

Analysts expect Alibaba's revenue to rise just 7% in fiscal 2023 (which ends this month) as it grapples with macro, competitive, and regulatory headwinds in China. JD's revenue only rose 10% in 2022.

Pinduoduo has been growing faster than its closest peers for three reasons. First, it dominated China's lower-end market with its cheap products and bulk purchase model, which encourages its shoppers to pool their orders together for deeper discounts. Second, it disrupted supermarkets and online grocers by enabling farmers to directly sell their fresh produce to customers at lower prices. Lastly, China's antitrust crackdown on Alibaba -- which forced the market leader to end its exclusive deals with merchants and rein in its loss-leading promotions -- likely drove more shoppers to Pinduoduo.

At first, the bears claimed Pinduoduo was just another hypergrowth e-commerce company that would never turn a profit. But as the following table illustrates, economies of scale kicked in and helped Pinduoduo turn firmly profitable on a generally accepted accounting principles (GAAP) basis over the past two years.

Data source: Pinduoduo. GAAP USD terms.

During the fourth-quarter conference call, Pinduoduo CEO Chen Lei said "consumption continues to recover and consumer sentiment continues to improve" across China as it ends its zero-COVID lockdown policies.

The company didn't provide a forecast for 2023, but analysts expect its revenue and net income to rise by 27% and 11%, respectively. That makes it one of the world's fastest-growing e-commerce leaders alongside Latin America's MercadoLibre, which is expected to grow its revenue and earnings by 24% and 78%, respectively, this year.

So why did Pinduoduo's stock tumble?

Pinduoduo's core business looks healthy, and its stock looks reasonably valued at 21 times forward earnings. Alibaba and JD have lower forward multiples of 13 and 22, respectively, but they're also growing slower than Pinduoduo. Pinduoduo's U.S. marketplace, Temu, has also grown like a weed since its debut last fall and is clawing away at Amazon's third-party marketplace, ContextLogic's Wish, and Alibaba's AliExpress in the cross-border market.

But despite all of those strengths, investors seem to be avoiding Pinduoduo because it's a Chinese stock. Therefore, it's still exposed to delisting threats in the U.S., tariffs on Temu's exports, and other trade tensions between the U.S. and China.

For example, Alphabet's Google recently suspended Pinduoduo's app from its Play Store over malware concerns. That move won't hurt Pinduoduo, since it generates most of its sales in China (where the Play Store is banned) and Google didn't touch Temu. However, the possibility that Temu could also be abruptly banned in the U.S. raises a few red flags.

The gloomy outlook for the broader e-commerce market, which faces tough comparisons to the pandemic and inflationary headwinds, also likely prevented investors from buying Pinduoduo's stock. That's why its stock stumbled after its seemingly mild top- and bottom-line miss in the fourth quarter.

But it's still a great buy for long-term investors

Pinduoduo faces some near-term uncertainties, but it's well-positioned to generate double-digit revenue and profit growth for years to come. It's carved out a defensible niche with its bulk purchase and farm-to-door strategies, and Temu could still have plenty of room to grow overseas as it eliminates struggling rivals like Wish and pulls Chinese merchants away from Amazon and AliExpress. Once a new bull market starts, Pinduoduo's stock could rally and command a much higher valuation.