Shares of PDD Holdings (PDD +0.28%) fell 13.6% this week, according to data from S&P Global Market Intelligence. A Chinese technology giant that owns the e-commerce website Temu and its homegrown Pinduoduo online shopping platform, it reported earnings for the third quarter this week that disappointed investors. The company keeps growing revenue but is facing cost pressures due to rising competitiveness, both in the United States and China.
Here's why shares of PDD Holdings slipped this week, and whether investors should buy the dip on the stock right now.
NASDAQ: PDD
Key Data Points
Steady growth, but increasing costs
PDD Holdings has quickly turned into one of the world's largest e-commerce companies after being founded just 10 years ago. Over the last twelve months, the company has generated close to $60 billion in revenue, up from a fraction of that level 5-10 years ago.
Last quarter, the business grew once again. Revenue was up 9% year-over-year to $15.2 billion, however, this is a large slowdown from the company's historical rates of growth, with revenue up 44% year-over-year in the same quarter a year ago, as an example. Slowing revenue growth is something investors never like to see, and was likely a reason for the falling stock price this week.
On top of slowing growth, PDD Holdings is facing rising competition that is causing it to spend more on marketing and merchant benefits on its platform, which is impacting its profit margin. Operating profit grew just 3% year-over-year last quarter, and its operating margin has slipped from 28% at the start of this year to 22% over the last twelve months. In the United States, the Temu platform is facing more competition from the likes of Amazon, which is increasing its assortment of discounted items and speeding up delivery times.
Image source: Getty Images.
Is PDD Holdings a cheap stock today?
After the stock drop this week, PDD Holdings' price-to-earnings ratio (P/E) has fallen back below 12. Compared to the S&P 500 Index average of around 30, this looks like a cheap stock even when considering the company's slowing revenue growth and contracting profit margin.
Investors should remember that this is a company mainly operating in China, a market that is tough to analyze as an outsider. Retail in the country is hypercompetitive. Past disruptors like PDD Holdings can quickly turn into the disrupted, with little warning to people not actually living there. For that reason, investors should exercise caution before leaping into buy the dip on PDD Holdings stock.
