Shares of PDD Holdings have surged 120% in the past year as revenue continues to grow. Is it too late to buy?

PDD holdings (PDD -1.48%) continues to experience exceptional growth. The Chinese e-commerce company’s revenue more than doubled again in the last quarter. The stock has managed to buck the trend of other Chinese companies and is now up over 120% over the past year.

With this much growth already built into the share price, is it too late to buy the stock?

Exceptional revenue growth

In the first quarter, PDD revenues grew 131% to $12 billion. Transaction services revenue increased 327% to $6.1 billion, while internet marketing revenue increased 56% to $5.9 billion.

Transaction services, which the company describes as fees charged to merchants for transaction-related services, accounted for just 15% of its revenue in 2021, but accounted for more than half of its revenue last quarter. Revenues from DuoDuo’s food business, launched in 2020, and Temu’s international marketplace, launched in 2022, are included in this revenue line and help explain some of the growth.

PDD also collects marketing services revenue from providing services that match product listings in search results to products on its platforms. This is a PDD that allows sellers to bid on keywords that match product listings or obtain ad placements through banner ads, for example.

Profitability increased more than revenue, with operating profit increasing 275% to $3.6 billion, while adjusted American depositary earnings per share (ADS) increased to $2.83 from $1.01 in the year-ago quarter.

Not everything is rosy

Not everything was positive in PDD’s first-quarter results, with gross margin falling to 62.3% from 70.5% a year earlier. Competition in China is fierce, with companies giving concessions to third-party sellers on their platforms. Meanwhile, Temu is attracting customers with introductory offers with deep discounts. Both of these dynamics are likely to put pressure on gross margin.

One of PDD’s problems is that it is one of the least transparent companies when it comes to both reporting results and answering questions on conference calls. The company does not separate segments such as Temu or grocery DuoDuo, so there is no clear indication of the revenue, revenue growth or profitability of these companies. However, Earnest Analytics estimates that Temu’s revenue increased by 840% in 2023.

PDD also spends billions of dollars on advertising in the US Goldman Sachs last year, it is estimated that the company spent an average of $5 to win an order worth an average of $39 in the US. The investment bank estimates this led to a loss of $6 per order in the U.S. and $18 in other markets.

Given these economic factors and the impact of increased competition on Pinduoduo’s core business in China, it is perhaps surprising that its profitability grew faster than revenue.

When asked in the earnings report how profitability outperformed revenue despite increased competition and how it recorded such solid operating leverage, PDD management simply responded that profitability did not follow a linear path and that it would exceed expectations in some quarters and miss in others.

Attractive pricing

Despite the share price surge over the past year, PDD stock is cheap, with a forward price-to-earnings (P/E) ratio of just 12.5 times. For a company that is growing its revenues as quickly as PDD, this is an almost unheard of valuation.

PDD PE ratio data (forward) by YCharts.

That said, there are also risks for the stock. As noted earlier, the company lacks transparency and that is a problem. While there are estimates of the revenue generated by Temu and DuoDuo, the company has never determined this, so investors aren’t sure what they’re buying when they invest in PDD.

He also found himself in the crosshairs of the US government. Sen. Tom Cotton, an Arkansas Republican, has asked President Joe Biden to ban the app over issues including counterfeiting, intellectual property theft and human rights abuses, including the use of slave labor. Other lawmakers have also called for Temu’s ban in the past.

It also came under scrutiny in Europe. Several consumer protection groups in the European Union have filed complaints about the company’s violations of the regional Digital Services Act. Meanwhile, Germany is pushing to end an important tax exemption the company enjoys.

Overall, despite PDD’s attractive valuation and exceptional growth, I would prefer to stay on the sidelines. There are many good investment opportunities in companies that are more transparent and less controversial.