Investment bank Morgan Stanley shook up the market for Chinese e-commerce stocks Thursday evening, downgrading Alibaba (BABA 0.59%) in a research report on the industry, cutting its price target on JD.com (JD 6.12%), but naming PDD Holdings (PDD 2.80%) its top pick in the sector. Despite the bank having different opinions on the three different stocks, however, investors seem to have read only the negatives in Morgan Stanley's note -- and are selling shares in all three companies.

As of 10:55 a.m. ET, Alibaba shares are down 2.9%, while both JD.com and PDD Holdings are off 1.9%.

What Morgan Stanley said

The uniformly negative reaction to Morgan Stanley's news may be owing to the tone set in the bank's discussion of the best known of these three stocks, Alibaba. As StreetInsider.com explains, MS removed its overweight rating from China's biggest e-commerce stock and replaced it with an equal-weight rating -- and a lower, $90 price target.

MS cited problems with Alibaba's artificial intelligence and cloud computing business, which we've discussed here as well earlier in the week, and which include but are not limited to management's decision to pull the planned IPO of its Cloud Intelligence Group. But MS also pointed to a slow turnaround in Alibaba's Customer Management Revenue business -- i.e., e-commerce, by far the largest source of revenue for Alibaba at $84.8 billion last year, according to data from S&P Global Market Intelligence.

E-commerce troubles were also the source of MS's decision to cut its price target on JD.com by 10%, to $30 a share (also with an equal-weight rating). As TheFly.com points out, the analyst has doubts about JD's ability to grow by undercutting competitors on price (and indeed, revenue growth at the company was less than 2% last quarter). MS pointed out that rival PDD is expanding in electronics and home appliance sales, threatening JD's sales growth and pressuring its profit margins.

Good news for PDD Holdings?

Which naturally brings us to PDD Holdings -- the sole beneficiary of good news today, as Morgan Stanley maintains its overweight rating on the stock and raises its price target 6% to $181 per share. Consumers are shifting spending to PDD, it seems, and the company boasts a "favorable business model," notes TheFly. Additionally, MS says PDD has an international sales business, Temu, which is "not fully valued by the market."

Thus, in a competitive market, Morgan Stanley sees PDD Holdings as investors' best bet to profit, naming the company its top pick in Chinese e-commerce. But is it right to do so?

On the one hand, sure, PDD seems to be the strongest of the three businesses, with most analysts forecasting 23% annual earnings growth for the company over the next five years. That's better than the 20% growth rate predicted for JD.com, and much better than the sub-14% forecast for Alibaba. And yet PDD Holdings stock is also the most expensive of the three, sporting a P/E ratio of more than 33 times earnings -- versus JD.com at only 13x and Alibaba at a mere 10.5x.

In fact, when valued on PEG (that's the P/E ratio divided by the growth rate) it turns out that both Alibaba and JD.com sell for PEG ratios below 1.0 (making them potential value stocks). In contrast, PDD Holdings -- again, this is Morgan Stanley's favorite -- is the only one of the three that costs so much that despite its superior growth rate, it has a PEG ratio of 1.4, which takes it out of value territory.

Morgan Stanley's endorsement notwithstanding, I'd therefore place PDD Holdings dead last on any shopping list of Chinese e-commerce stocks.