Is Pinduoduo (PDD) Stock a Buy Now?

Pinduoduo's (PDD 2.80%) stock surged 15% on Aug. 29 after the Chinese e-commerce company posted its second-quarter results. Its revenue rose 66% year over year to 52.28 billion yuan ($7.21 billion) and exceeded analysts' expectations by $1.18 billion. The company's adjusted net income increased 42% to 15.27 billion yuan ($2.11 billion), or $1.44 per American depositary share (ADS), and also easily cleared the consensus forecast by $0.42 per ADS.

That impressive top- and bottom-line beat justified Pinduoduo's post-earnings pop, but it still remains more than 50% below its all-time high from early 2021. Is it time to finally hop aboard the bullish bandwagon?

Image source: Getty Images.

Another quarter of strong growth and rising margins

Pinduoduo is China's third-largest e-commerce company by annual revenue after Alibaba (BABA 0.59%) and JD.com (JD 6.12%). But it's been growing much faster than both of those market leaders for three simple reasons.

First, Pinduoduo initially carved out a niche by selling discount and off-brand products across China's lower-tier cities. It also encouraged shoppers to team up across social media platforms to score steeper discounts on bulk purchases.

Second, Pinduoduo capitalized on that early growth to build an online agricultural platform across China for delivering fresh produce from farmers to customers.

Finally, Pinduoduo likely benefited from China's antitrust crackdown on Alibaba, which drove the market leader to end its exclusive deals with merchants and aggressive loss-leading promotions.

Pinduoduo went public in 2018, and the bears initially claimed it could never turn profitable by generally accepted accounting principles (GAAP) measures. But it actually turned profitable, with rising operating margin over the past two and a half years.

Data source: Pinduoduo. GAAP USD terms.

Pinduoduo's operating margins turned positive in 2021 as economies of scale kicked in, it reined in spending, and phased out its lower-margin first-party marketplace. By comparison, Alibaba and JD reported lower GAAP operating margins of just 18% of 3%, respectively, in their latest quarters.

Those fundamental improvements gave Pinduoduo breathing room to offer more promotions, allocate more resources toward its highest-rated merchants, make fresh investments in its ecosystem, and expand its rapidly growing cross-border marketplace, Temu, to connect its Chinese merchants to overseas buyers. The company also continues to invest in agricultural projects across China to modernize the sector's infrastructure and drive more farmers to sell their fresh produce on its marketplace.

During the second quarter, co-CEO Jiazhen Zhao said Pinduoduo "saw a positive shift in consumer sentiment" in China's post-lockdown market, which fueled a "rise in demand across various product sectors." Management didn't provide a precise outlook for the rest of the year, but analysts expect the company's revenue and GAAP net income to grow 54% and 32%, respectively.

Alibaba and JD are expected to generate just 11% and 5% sales growth, respectively, in their current fiscal years. In other words, Pinduoduo will likely remain China's fastest-growing e-commerce leader for the foreseeable future -- and its stock still looks reasonably valued at 23 times forward earnings and 4 times this year's sales.

Is it the right time to buy Pinduoduo?

Pinduoduo's valuation is likely being compressed by concerns about China's post-lockdown recovery, competitive pressure from Alibaba and JD, and the persistent delisting threats for U.S.-listed Chinese stocks. But if you believe those headwinds will dissipate over the long term, it might smart to invest in Pinduoduo before the bulls pay attention again.