PDD (PDD 1.30%) posted its first-quarter earnings report on May 22. The Chinese e-commerce giant's revenue soared 131% year over year to 86.81 billion yuan ($12.02 billion) and exceeded analysts' estimates by $1.44 billion. Its adjusted earnings per ADS surged 199% to $2.83 and also cleared the consensus forecast by $1.40.
PDD's growth rates were impressive, but its stock has already risen nearly 160% over the past 12 months. Should investors chase that rally or wait for a pullback?
Image source: Getty Images.
Why is PDD growing so rapidly?
PDD, which is short for Pinduoduo, is China's third-largest e-commerce company by revenue, after Alibaba and JD.com. It initially carved out a niche with its discount marketplace, which encouraged shoppers to team up across social media platforms to score bulk discounts. That strategy caught Alibaba and JD off guard, and Pinduoduo gained hundreds of millions of shoppers across China's lower-tier cities.
PDD capitalized on that early growth spurt to build an online agricultural marketplace that cut out the middlemen retailers to directly connect China's farmers to its online shoppers. It also expanded overseas with Temu, a cross-border e-commerce platform that lets its Chinese merchants sell their products to overseas buyers.
Both of those expansion strategies were successful. PDD is now China's largest online agricultural platform, while Temu became one of the fastest-growing e-commerce platforms in the U.S., Europe, and other overseas markets.
NASDAQ: PDD
Key Data Points
From 2019 to 2023, PDD's revenue rose at a whopping compound annual growth rate (CAGR) of 69%. It also turned profitable in 2021 as it phased out its lower-margin first-party marketplace, expanded its higher-margin third-party marketplace, and reduced its logistics costs. From 2021 to 2023, its net income rose nearly eightfold.
Those explosive growth rates have made PDD one of the few Chinese stocks U.S. investors are still buying amid the escalating tensions between the U.S. and China. That's why it has easily outperformed Alibaba and JD over the past five years.
How much higher can PDD soar?
It's easy to see why PDD attracted a stampede of bulls. Over the past year, its revenue growth consistently accelerated, its operating margins expanded, and its net income soared on a generally accepted accounting principles (GAAP) basis.
|
Metric |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
|---|---|---|---|---|---|
|
Revenue Growth (YOY) |
58% |
66% |
94% |
123% |
131% |
|
Operating Margin |
18% |
24% |
24% |
25% |
30% |
|
Net Income Growth (YOY) |
212% |
47% |
47% |
146% |
246% |
Data source: PDD. Growth rates based on reported RMB figures. YOY = year over year. GAAP figures.
The stabilizing macro environment in China, the growth of its online agricultural marketplace, and Temu's overseas expansion all lifted sales and profits. PDD also likely benefited from China's antitrust crackdown on Alibaba, which hobbled its top competitor with tighter restrictions on its loss-leading promotions, exclusive merchant deals, and other investments.
PDD's revenue soared 90% in 2023, while Alibaba's comparable Taobao and Tmall Group only grew revenue 5% in fiscal 2024 (which ended this past March). JD's revenue increased a mere 4% in 2023. PDD should also continue growing much faster than its rivals for the foreseeable future. From 2023 to 2026, analysts expect revenue and net income to both increase at a CAGR of approximately 33%.
Those are incredible growth rates for a stock that trades at 13 times forward earnings and less than four times this year's sales. Amazon, which is growing at a much slower rate, trades at 40 times forward earnings and three times this year's sales. That said, PDD's valuations could stay compressed as long as U.S.-China tensions persist. It could also face unpredictable competitive and regulatory headwinds.
In PDD's latest conference call, co-CEO Chen Lei admitted PDD's industry peers had "significantly stepped up their efforts" to compete against its platform. As for the regulatory challenges, Temu could face more pressure from regulators in the U.S. and Europe as they crack down on popular apps -- like ByteDance's TikTok -- that are tethered to Chinese companies.
PDD has more room to run
PDD had a great run over the past 12 months, but it still trades nearly 30% below its all-time high from Feb. 2021. It also looks dirt cheap relative to its long-term growth potential.
Therefore, the decision to buy or avoid PDD is a simple one. If you believe macro forces present too much risk for the company, then you should avoid PDD and its peers. Otherwise, this stock could be a great long-term play at its current valuations.
