Does Temu’s success make PDD Holdings (NASDAQ:PDD) stock worth buying?

PDD holdings (NASDAQ:PDD), or Pinduoduo as it was called, has shown explosive growth, thanks in part to the release of the Temu shopping app. Forecasts indicate that this very strong growth trajectory is likely to continue into the medium term. However, PDD does come with regulatory and political risks due to its Chinese origins and potential changes in Western policy that could have a negative impact on the company’s business, which is why I am neutral on the company.

What is PDD?

PDD Holdings is an international e-commerce giant. It recently moved its headquarters from Shanghai to Dublin, Ireland, although from what I understand, there are very few employees working in the new headquarters. The Dublin-based company, originally known as Pinduoduo, changed its name to PDD Holdings in February 2023.

PDD Holdings operates several businesses. The company’s flagship platform, Pinduoduo, is a leading social commerce app in China that focuses on group buying to unlock significant discounts.

In addition, PDD launched Temu in 2022. This is an online PDD marketplace designed to serve international markets, especially in North America. Temu leveraged Pinduoduo’s business model and technology infrastructure. Temu’s success was groundbreaking, attracting customers with competitive prices.

Oddly enough, agriculture is the company’s core business. Through Pinduoduo, PDD has also made significant investments in agriculture, aiming to revolutionize the sector by directly connecting farmers with consumers. The company claims that by cutting out middlemen, it delivers fresher produce and better prices for both parties.

Impact of Ago on PDD

While PDD does not result in revenue sharing, given the interest the Temu app has generated, it seems highly likely that Temu has become a major growth driver for the company. This North American-specific mobile app boasts over 167 million monthly active users, and PDD’s revenue growth following the launch of Temu has been very strong. In 2023, the application was at the top of download lists and enjoyed great interest in advertising, including: during the Super Bowl.

More broadly, PDD has generated incredible growth from 2016 – when revenue was $73 million – to 2023 – when revenue was $34.4 billion. The company’s earnings per share (EPS) have also increased significantly since the launch of Temu, from $3.99 in 2022 to $6.46 in 2023. Between 2022 and 2023, PDD’s revenue grew from $19 billion to $34.4 billion.

Additionally, Temu’s gross merchandise volume will reach $15.1 billion in 2023, according to my estimates, while sales are expected to reach $37 billion in 2024. This forecast suggests that Temu will represent more than half of PDD’s revenue in 2024.

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PDD’s profit forecast is hard to believe

PDD’s growth trajectory remains impressive. Looking ahead, revenue is expected to increase from $34.4 billion last year to $57 billion in 2024, $71.2 billion in 2025, and $87.9 billion in 2026. After 2026, the number of analysts covering the stock drops dramatically from 27 to just three. Only one analyst covers the stock until 2033, when they predict PDD will bring in $139.6 billion in revenue.

So how does this translate into earnings? Well, in 2024 EPS is expected to be $11.75 and in 2025 it will increase to $14.91. EPS is expected to be $17.96 in 2026. This exceptional earnings growth appears to be largely due to Temu.

However, these forecasts may mean little if the regulatory or geopolitical environment deteriorates. Political tensions between the US and China have led to increased scrutiny of Chinese technology companies, with former President Donald Trump proposing to impose high tariffs on Chinese goods, potentially exceeding 60%. This could impact PDD’s U.S. market business if he returns to office.

Trump’s proposed measures stem from a myriad of concerns, including data security and economic competition. Admittedly, such a move could gain bipartisan support, reflecting a tougher stance against Chinese tech companies and good manufacturers.​

Based on current forecasts, PDD is trading at 11.8x forward earnings and has a forward price-to-earnings-to-growth (PEG) ratio of just 0.32x (a PEG ratio of 1.0x or less is generally viewed as undervalued). .

Do analysts think PDD Holdings shares are worth buying?

At TipRanks, PDD is rated as a Strong Buy based on 13 Buys, 0 Holds, and 0 Sell ratings from analysts over the past three months. The average target price for PDD Holdings stock is $218.36, implying an upside potential of 65.5%.

PDD Holdings Stock Summary

PDD Holdings has shown incredible growth in recent years, and most analysts expect this trend to continue. Revenues are expected to double in the medium term and profits are also on a strong upward trend. This also appears to be overlooked, as evidenced by the forward PEG ratio of 0.32x. However, I am neutral because geopolitical events and more protectionist US policies could put an end to PDD’s success story.

Disclosure