The Best Growth Stock No One Is Talking About

When you ask people to name a growth stock, many will mention common names such as: Amazon, NvidiaAND Tesla. All of these companies are great leaders in their fields.

However, there are some lesser-known growth stocks that have a lot to offer investors, and PDD Holdings (PDD 0.82%)a leading e-commerce player from China is one such company.

An exceptional track record in implementation

AlibabaChina’s largest e-commerce company, has historically attracted interest from American investors. And it’s understandable why PDD, Pinduoduo’s parent company, hasn’t been in the spotlight — the company has only been around since 2015.

While many factors contributed to Pinduoduo’s incredible growth, one key aspect of its early success was its focus on rural areas and small towns. With industry leaders Alibaba and JD.com By competing for customers in major cities, Pinduoduo has gained massive reach (and market share) among underserved consumers.

Founder and former CEO Colin Huang also saw the potential of the bulk-buying business model, in which customers combine their orders to buy in bulk from suppliers and benefit from lower prices. Customers loved the savings, and Pinduoduo quickly became one of China’s largest e-commerce companies.

To put PDD’s incredible growth into perspective, it took Pinduoduo just four years to post $100 billion in gross merchandise value (GMV). Alibaba took nine years to reach that number.

When Pinduoduo hit that milestone in 2019, its revenue for the year was $4.3 billion. Last year, PDD’s top line rose to $34.9 billion, and the company posted a record net profit of $8.5 billion.

The management team has performed world-class activities, helping PDD to achieve the scale of its operations today.

Expansion from China to the Global Stage

The company shocked its investors when Colin Huang stepped down as chairman in 2021. Just months earlier, he had also stepped down as CEO. In his latest letter to shareholders, Huang wrote about what he expected from Pinduoduo in the coming years.

He mentioned the key point that “Pinduoduo will strive to become a mature and global public organization.” And over the past few years, Pinduoduo has aggressively expanded overseas under another banner, Temu.

Temu debuted in the US market in 2022 and currently operates in over 50 markets. And although the brand is less than two years old, it has made solid progress. For example, Temu reached 82 million active users in the US in September 2023, and in recent months, the Temu app has reached over 50 million monthly downloads.

Temu’s value proposition to users is simple: high-quality products at attractive prices. To do this, it leverages Pinduoduo’s experience, know-how, and extensive supply chain resources to serve overseas consumers. It also invests heavily in marketing to acquire users worldwide, and can do so thanks to its parent company’s solid financial position—PDD Holdings had $33.5 billion in cash and investments and little debt at the end of the first quarter.

Still, investors should keep in mind that Temu’s overseas expansion isn’t without risk. It must contend with formidable competitors like Amazon, vastly improve its quality control and logistics, and weather the scrutiny of local regulators. While the ultimate reward could be huge, the road ahead is likely to be bumpy.

What does this mean for investors?

Pinduoduo began its incredible growth story by challenging the dominant players in the Chinese e-commerce market. Now it is trying to replicate that success on a global scale with Temu.

While this story may be compelling, investors should be aware of the risks associated with owning shares of companies based in China, including geopolitical tensions and regulatory scrutiny (both domestically and abroad). The poor market sentiment surrounding Chinese stocks explains why PDD Holdings trades at just 17 times past-year earnings.

However, for investors willing to take that risk and become part of one of the world’s leading e-commerce companies, PDD offers an impressive combination of hyper-growth and profitability.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lawrence Nga holds positions in Alibaba Group and PDD Holdings. The Motley Fool holds positions in and recommends Amazon, JD.com, Nvidia, and Tesla. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.