China's PDD Holdings (PDD 2.80%) isn't exactly a household name here in America. In fact, there's a good chance you've never even heard of it. Even prior to its name change early this year, the company formerly known as Pinduoduo wasn't exactly a head-turner.
Much has changed in the meantime, however. Indeed, spurred by sales growth that's easily outpacing most of the company's direct competitors, PDD's $190 billion market capitalization is on par with Alibaba's and is more than 4 times bigger than JD.com's. The market is suddenly taking notice of PDD Holdings' unexpected success.
Here are three bullish reasons there's plenty more upside left to tap with this stock.
PDD Holdings, up close and personal
First things first. What is PDD?
Founded in 2015 as an e-commerce platform called Pinduoduo, it was anything but your typical place to buy and sell consumer favorites like electronics and apparel. Founder Colin Huang's initial intent was to establish a way for China's consumers to get China's produce -- fruits and vegetables -- more efficiently.
And it worked. It worked so well, in fact, that more conventional goods have been added to the site's selection of items for sale.
What hasn't changed is the underlying premise of the business model itself.
PDD's business is helping manufacturers better connect directly with consumers, bypassing retailers. It also offers a deep array of logistics services, solving some of the more complicated problems manufacturers and growers encounter when selling goods online. It's a particularly useful platform for new or young brands, helping them get going by jump-starting their online sales.
While its roots may be planted in China, PDD is now using the same approach to establish itself in other parts of the world. It's not using the Pinduoduo name outside of China, however. You'll know it better in the United States as Temu -- yes, the website that offers amazing prices on a huge selection of goods.
This overseas expansion has faced a few bumps in the road to be sure, not the least of which are merchandise quality issues. On balance, though, there's still more to like about the company than there is not to like as you'll see below.
1. China's retail sales are recovering
Investors keeping tabs on the health of China's economy likely know that heavy-handed pandemic lockdowns were still in place for the better part of 2022. Beijing finally eased off late last year, but many observers feared too much damage had already been done to the country's economy. Some believed that China might need a year or more to fully shake off the impact.
The country's consumers may be in better shape than suspected, however. November's retail sales growth in China rose for a fourth consecutive month, reaching a pace of 10.1%. China's industrial production also grew 6.6% last month, reaching a two-year high.
For the record, both measures were in comparison to particularly poor numbers logged in Nov. 2022. Progress is progress though -- think spending trajectories rather than absolute spending levels -- and this particular progress bodes well for Pinduoduo as more of the nation's retail consumption moves online.
To this end, PDD's top line grew an incredible 94% during the third quarter, pointing to success inside and outside China. Analysts are looking for full-year top-line growth of 81%, pushing last year's per-share profit of $3.86 up to $5.77.
2. PDD's Temu is a hit outside of China
Pinduoduo is doing fine within China. There's no denying, however, that Temu is making bigger waves in markets outside that country.
As noted, Temu has a bit of a credibility problem -- shoppers love its low prices, but the images of what its sellers are offering are sometimes not what buyers are receiving. At least some of that issue is the nature of the business model itself. Temu is trying to connect manufacturers directly to consumers, and sellers offering poor-quality products make their way into the mix.
By and large, though, the young online selling platform is a hit with buyers and sellers, offering sellers something they've been missing for some time now. Most buyers also seem to understand the idea of "you get what you pay for." Sometimes, consumers aren't looking for much!
And it's no longer just China and North America. Early this year, PDD made a concerted effort to establish and deepen its Temu presence in Europe following its successful arrival in North America.
There's also little doubt the e-commerce platform is drawing a crowd wherever it chooses to set up shop. Apple reports the Temu shopping app is 2023's most downloaded free iPhone app. It's also Android's second-most popular app of the year, trailing only TikTok.
3. PDD Holdings is singularly focused
Last but not least, buy PDD Holdings stock because it's singularly focused on e-commerce and isn't distracted by unrelated business lines. Generally speaking, diversification is a good thing. Investors are encouraged to diversify their portfolios across several sectors. Companies do it, too, to add new profit sources and spread out risk.
Diversification can have its downsides, though. Sometimes, getting into several different businesses adds complexity to a company's structure and operations that can prove more distracting and costly than it's worth.
Take the aforementioned Alibaba as an example. In addition to e-commerce, it manages a cloud computing operation, is working on artificial intelligence technology, and operates a small digital entertainment business, to name just a few.
Earlier this year, Alibaba announced its plans to split the company into six distinct units to improve the competitive standing of the individual businesses and increase shareholder value. The stock soared on the news of this potential restructuring.
That's not to say PDD won't or shouldn't launch other businesses or brands in the future. Not even a decade old yet, the company is still focused on making the most of the e-commerce opportunity it has in front of it.
Ready for the next era of selling online
These are other reasons to jump into PDD Holdings, but these three bullish arguments come at a time when its chief competitors are on the defensive trying to navigate the current online shopping market and new Chinese regulations.
There's a decreasing need for wholesalers and distributors now that platforms like Temu and Pinduoduo are available. This new paradigm could become the new norm, and PDD is already positioned to lead the charge.
