The Best Growth Stock That Nobody Is Talking About

When asked to name a growth stock, many people will come up with household names like Amazon, Nvidiaand Tesla. These are all great companies that are leaders in their respective fields.

However, there are lesser-known growth stocks with plenty to offer to investors, and PDD Holdings (PDD 0.82%)a major e-commerce player from China, is one such company.

A remarkable track record of execution

Alibaba, the biggest e-commerce company in China, has historically enjoyed the spotlight among US investors. And it’s understandable why PDD, the parent of Pinduoduo, has flown under the rader — the company has only been around since 2015.

While many factors have contributed to Pinduoduo’s incredible rise, one key aspect of its early success was a focus on rural areas and small cities. With industry leaders Alibaba and JD.com fighting over customers in the biggest cities, Pinduoduo built up enormous mindshare (and market share) among underserved shoppers.

Founder and ex-CEO Colin Huang also saw the potential of a group-buy business model where customers combine their orders to buy in bulk from suppliers and benefit from lower prices. Customers loved the savings, and Pinduoduo has quickly become one of China’s biggest e-commerce companies.

To put PDD’s incredible rise into perspective, it took just four years for Pinduoduo to report gross merchandise value (GMV) of $100 billion. Alibaba needed nine years to reach that figure.

When Pinduoduo achieved that milestone in 2019, its revenue for the year was $4.3 billion. By last year, PDD’s top line had surged to $34.9 billion, and it reported a record net profit of $8.5 billion.

Management has executed at a world-class level to help PDD reach its current scale.

Expanding from China to the global stage

The company shocked its investors when Colin Huang relinquished his chairmanship in 2021. Just a few months earlier, he stepped down from the CEO role as well. In his last shareholder letter, Huang wrote about what he expected for Pinduoduo in the coming years.

A critical point he mentioned was that “Pinduoduo will endeavor to become a mature and global public organization.” And in the past few years, Pinduoduo has aggressively expanded overseas under another banner, Ago.

It debuted in the US market in 2022, and it now operates in over 50 markets. And while the brand is less than two years old, it has made solid progress. For instance, Ago reached 82 million active users in the US in Sept. 2023, and in recent months, the Temu app achieved more than 50 million monthly downloads.

Temu’s value proposition to users is straightforward: quality products at attractive prices. To this end, 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 globally and can afford to do that thanks to its parent company’s solid financial position — PDD Holdings had $33.5 billion in cash and investments with little debt at the end of the first quarter.

Still, investors should be mindful that Temu’s overseas expansion is not without risk. It has to face formidable competitors like Amazon, significantly improve its quality control and logistics, and withstand scrutiny from local regulators. While the end prize might be huge, the road ahead will likely be bumpy.

What it means for investors

Pinduoduo started its incredible growth story challenging the incumbents in the Chinese e-commerce industry, and now, it’s trying to repeat that success on a global scale with Temu.

As compelling as that story may be, investors should be aware of the risks that come with owning shares of China-based companies, including geopolitical tensions and regulatory scrutiny (both at home and abroad). Poor market sentiment around Chinese stocks explains why PDD Holdings trades at just 17 times trailing earnings.

But for investors willing to take on that risk to own a piece of one of the world’s leading e-commerce operations, PDD offers an impressive combination of hypergrowth 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 has positions in Alibaba Group and PDD Holdings. The Motley Fool has positions in and recommends Amazon, JD.com, Nvidia, and Tesla. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.