Time to buy this hyper-growth e-commerce giant

PDD Holdings Inc. NASDAQ: PDD is a Chinese e-commerce company that primarily operates two popular online businesses. Their primary business is the social commerce company Pinduoduo. Tomu is their secondary business, an online store known for selling heavily discounted products directly from manufacturers and factories in China. The combination of these two businesses has generated hyper-growth revenue streams that sometimes seem too good to be true.

However, the sell-off in Chinese tech stocks has also hit PDD, sending the stock down 6.92% year-to-date (YTD) compared to the Nasdaq-100’s 21.16% YTD performance. While their products appeal to budget-conscious buyers, value investors may be interested in taking a look at this hyper-growth stock trading at just 11.94x forward earnings.

PDD Holdings is a multi-industry conglomerate that competes with other Chinese e-commerce and digital marketplace companiesSuch as Alibaba Group Inc. NYSE: BABA, JD.com, Inc. NASDAQ: JD, AND Amazon.com Inc. NASDAQ: AMZN.

Pinduoduo is a pioneer of the social commerce model

Social commerce is a new term coined in the age of social media. It uses social media to help promote products while allowing users to purchase them directly through the social media platform and app. Pinduoduo has taken this concept a step further. Users find products they like on Pinduoduo and can get a price cut when they recruit family and friends to join them in the shopping.

The deeper discount mechanism encourages social sharing while also building a sense of urgency to close deals before they’re gone. Gamification is also built into the process with social games like pinwheels and daily check-in rewards, flash sales, gifting, and the ability to earn points. The convenience factor is baked into the process, as mobile is the primary access point to the platform. Pinduoduo’s success in China prompted management to parlay its success outside of China into a new platform called Temu.

This is a magnet for growth

It burst onto the scene and quickly became one of the most downloaded e-commerce apps in a matter of months, offering incredible discounts on products sold for literally pennies. Social media influencers on TikTok and Alphabet Inc. NASDAQ: GOOGL being the owner of YouTube, he contributed to the growth of Temu’s popularity.

Gamification is heavily integrated with promotions, which helps it spread like wildfire. TEMU launched in July 2022 and has captured 17% of the US discount online marketplace. The prices are so ridiculously low that users feel like they can “shop like a billionaire,” just like their logo. The name Temu is short for “Team Up, Price Down,” which was the pricing concept behind Pinduoduo. Temu has grown its customer base to over 167 million monthly active users (MAUs) worldwide.

This is also a magnet for controversy

With such meteoric growth, there’s always going to be controversy. One of the most common complaints about Temu is the poor quality of its merchandise. As quickly as it became popular on social media with its deals, it also gained a reputation for shoddily made merchandise, as highlighted in its videos. Its Better Business Bureau rating is C+, with many complaints about non-delivery, falling-apart merchandise, and misleading descriptions. However, the company is diligent about responding to complaints, as every complaint posted gets a boilerplate response. Nevertheless, Temu continues to drive PDD’s growth despite being unprofitable.

PDD is located in the descending triangle structure

The daily candlestick chart for PDD illustrates a descending triangle pattern – a descending trendline formed at the swing high of $164.69. The descending upper trendline formed from the lower highs while attempting to rebound down to the flat lower trendline at $133.10. A breakout attempt was made on June 27, 2024, but the stock bottomed out at $130.05 and bounced back higher to the descending trendline. PDD continues to approach the high. The daily Relative Strength Index (RSI) has settled at the 42-band band. Retracement support levels are $133.10, $122.56, $113.36, and $104.95.

PDD stands out above average with its results for Q1 2024.

PDD Holdings reported a 246% increase in first-quarter 2024 net income of $3.87 billion. Non-GAAP earnings per share were $2.86, crushing consensus estimates by $1.43. Revenue increased 131% year over year to $12.02 billion, crushing consensus estimates by $1.4 billion. Marketing services revenue increased 56% to $5.8 billion. Transaction services revenue jumped 327% to $6.14 billion. The company closed the quarter on March 31, 2024 with $33.5 billion in cash and cash equivalents.

PDD Holdings Co-CEO Lei Chen made some interesting comments during the conference call: “We are not a conventional company, and we hope to show you the true face of our company, no matter how bumpy or rough the numbers may seem. Our business does not follow a linear path, and our profits will almost certainly fluctuate.”

As a caveat, Chen added: “We therefore suggest that our shareholders do not judge our overall performance based on the results of a few quarters. Our financial results may sometimes exceed or fall short of market expectations. However, as long as we remain focused on creating long-term value, these short-term fluctuations will ultimately coincide with our rising intrinsic value.”

Amazon.com plans to launch new direct sales section from China

According to a report by The Information, Amazon may be planning to launch a new marketplace that will source deeply discounted and unbranded products directly from Chinese manufacturers, similar to Temu. Orders will be shipped to customers within 9 to 11 days. The products include everyday items, clothing, and household items. Amazon has not officially announced its plans.

Analyst Ratings and Price Targets for PDD Holdings are at MarketBeat. Nine analysts support a Buy rating, with an average price target of $188.33, implying a 38.29% upside.

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