PDD Holdings (PDD 2.80%), more commonly known as Pinduoduo, became one of China's hottest growth stocks after its public debut in 2018. The Chinese e-commerce company's shares have risen eight-fold from its IPO price of $18 to about $144 today, and it could still have room to run as it locks more shoppers into its ever-expanding ecosystem.
PDD initially carved out a defensible niche with its steep discounts on bulk purchases, and it capitalized on that growth by building an online grocery platform that directly connected farmers to consumers. It also expanded beyond its market of lower-income shoppers by luring higher-end brands to its marketplace.
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PDD's revenue rose at a compound annual growth rate (CAGR) of 77% in U.S. dollar terms from 2018 to 2022, and analysts expect 81% growth in 2023. Let's review the main reasons to buy, hold, or sell PDD's stock in this tumultuous market.
The main reasons to buy and hold PDD's stock
PDD grew faster than its two larger competitors (in terms of annual revenue), Alibaba (BABA 0.59%) and JD.com (JD 6.12%), for four simple reasons.
First, PDD initially focused on gaining shoppers across China's lower-tier cities instead of going head-to-head with Alibaba and JD in saturated top-tier cities like Beijing and Shanghai.
Second, PDD encouraged its shoppers to team up on social media platforms to score steep discounts with bigger orders. That viral approach enabled it to gain hundreds of millions of shoppers without aggressive marketing and promotional campaigns.
Third, PDD benefited from China's antitrust crackdown on Alibaba in 2021, which forced the market leader to nix its exclusive deals with merchants, dial back its loss-leading promotions, and gain government approvals for its future investments and acquisitions. PDD and JD were only hit by lesser fines for their promotional tactics.
Lastly, PDD's farm-to-table marketplace grew rapidly by cutting out middlemen retailers like supermarkets and online grocery platforms.
Pinduoduo's future still looks bright. It turned profitable by generally accepted accounting principles (GAAP) measures in 2021, and its net profit nearly quadrupled in 2022. Analysts expect its earnings to grow another 49% in 2023. Its profitability improved as it reined in its spending, phased out its lower-margin first-party marketplace, and diluted its logistics costs.
PDD is also expanding rapidly beyond China with Temu, its new cross-border marketplace, which connects its Chinese merchants to overseas buyers. It's already been downloaded 40.5 million times as of September 2023, and it could chip away at Amazon and Alibaba's AliExpress in the cross-border market.
PDD is growing like a weed, but its stock still looks cheap at 20 times forward earnings. Alibaba and JD trade at lower multiples, but they're both struggling to grow as PDD expands rapidly across China and overseas markets.
The main reasons to sell PDD stock
PDD's stock is trading at a discount to its growth rates because it still faces regulatory challenges in China and the U.S. Over the past few years, PDD's soaring stock price made its founder, Colin Huang, the second-richest person in China. That wealth could prompt China's regulators to tighten their grip on PDD in the same way they reined in Alibaba's Jack Ma.
In the U.S., Alphabet's Google suspended Pinduoduo's main app from its Play Store earlier this year amid spyware concerns. A report from short-seller Grizzly Research in September also alleged that Temu contained spyware that deliberately targeted North American and European consumers.
Those concerns could prompt U.S. and European regulators to ban Temu's app and abruptly cut off its expansion beyond China. They might also prompt Chinese regulators -- which have been tightening their data privacy restrictions for individual apps over the past six years -- to closely scrutinize PDD's methods of gathering data.
Lastly, PDD, like many other Chinese companies, faces the threat of delisting from U.S. exchanges if it doesn't comply with tighter auditing rules.
All of those uncertainties should continue to compress its valuations for the foreseeable future.
Do PDD's strengths outweigh its weaknesses?
PDD's previous growth strategies and ambitious plans for the future indicate it's a well-oiled machine that isn't afraid to carve out new markets through bulk purchases, farm-to-table produce, and cross-border sales. Its soaring profits also show it's a disciplined spender with a sustainable business model, and its stock looks cheap relative to other hypergrowth stocks. The only problem is that the unpredictable regulatory threats could abruptly derail its growth.
I personally believe PDD can weather the near-term headwinds and continue thriving in China and overseas markets. I also think that once the saber-rattling ceases between the U.S. and China, the top Chinese stocks -- including PDD, Alibaba, and JD -- will rise again as they're revalued relative to their growth rates and not their regulatory challenges.
If you agree, then PDD is still a great long-term play for growth-oriented investors.
