PDD Holdings (PDD 2.85%) continues to see exceptional growth. The Chinese e-commerce company's revenue once again more than doubled in its most recent quarter. The stock has managed to buck the trend of other Chinese stocks and is now up over 120% over the past year.
With so much growth already priced into the stock, is it too late to buy the stock?
NASDAQ: PDD
Key Data Points
Exceptional revenue growth
For its first quarter, PDD saw its revenue surge 131% to $12 billion. Revenue from transaction services soared 327% to $6.1 billion, while revenue from online marketing climbed 56% to $5.9 billion.
Transaction services, which the company describes as fees it charges merchants for transaction-related services, was just 15% of its revenue back in 2021, but made up over half its revenue this past quarter. Revenue from its DuoDuo grocery business, launched in 2020, and international marketplace Temu, started in 2022, is included in this revenue line, and helps explain some of the growth.
PDD also collects marketing service revenue, which comes from providing services that match product listings in search results to products on its platforms. This is PDD allowing merchants to bid on keywords to match product listings or getting ad placements using things like banner ads.
Profitability increased more than revenue with operating profits jumping 275% to $3.6 billion, while adjusted earnings per American depositary share (ADS) soared to $2.83 from $1.01 in the year-ago quarter.
Image source: Getty Images.
Not everything is rosy
Not everything was positive about PDD's Q1 results, with gross margin falling to 62.3% from 70.5% a year earlier. Competition in China has been fierce, with companies giving concessions to third-party sellers on their platforms. Meanwhile, Temu lures customers in with initial heavily discounted offers. Both of these dynamics likely pressure gross margin.
One issue with PDD is that it is one of the least transparent companies around when it comes to both reporting results and answering questions on its conference calls. The company does not break out segments like Temu or DuoDuo grocery, so there is no clear indication of how much revenue, revenue growth, or profitability these businesses have. However, Earnest Analytics estimates that Temu revenue surged 840% in 2023.
PDD also spends billions of dollars on advertising in the U.S. Goldman Sachs estimated that last year the company spent an average of $5 to acquire an average order of $39 in the U.S. The investment bank estimates this led to a loss of $6 per order in the U.S. and $18 in other markets.
Given these economics together with the impact of increased competition on its core Pinduoduo business in China, it is perhaps surprising that its profitability grew faster than its revenue.
When asked on the earnings call how profitability outpaced revenue despite increased competition and how it saw such solid operating leverage, PDD's management simply said that its profitability does not follow a linear path and that for some quarters, it will beat expectations, and for others, it will miss.
Attractive valuation
Despite the stock's surge in price over the past year, PDD stock is cheap, trading at a forward price-to-earnings (P/E) ratio of only 12.5 times. For a company that has been growing its revenue as quickly as PDD, that's an almost unheard-of valuation.
PDD PE Ratio (Forward) data by YCharts.
That said, there are risks to the stock as well. As noted previously, the company lacks transparency, which is an issue. While there are estimates on how much revenue Temu and DuoDuo are generating, the company has never broken it out, so investors don't know with certainty what they are buying when investing in PDD.
Temu has also been in the crosshairs of the U.S. government. Sen. Tom Cotton, a Republican from Arkansas, has asked President Joe Biden to ban the app over such issues as counterfeit goods, intellectual property theft, and human rights abuses, including the use of slave labor. Other lawmakers have pushed to have Temu banned in the past, as well.
Temu also has begun to face scrutiny in Europe. Several consumer protection groups in the European Union have filed complaints about the company breaking the region's Digital Services Act. Meanwhile, Germany has been pushing to end an important tax exemption that benefits the company.
Taken altogether, despite PDD's attractive valuation and exceptional growth, I'd prefer to stay on the sidelines. There are plenty of good investment opportunities in companies that are more transparent and that carry less controversy.
