PDD Holdings (NASDAQ:PDD), or Pinduoduo as it was known, has demonstrated explosive growth, partly thanks to the release of its shopping application, Temu. Forecasts indicate that this very strong growth trajectory is likely to be sustained throughout the medium term. However, PDD holds regulatory and political risk due to its Chinese origins, with potential Western policy changes negatively impacting the business, and this is why I’m neutral on the stock.
What Is PDD?
PDD Holdings is a multinational e-commerce giant. It recently relocated its headquarters from Shanghai to Dublin, Ireland, although I gather that there are very few staff present at the new HQ. Initially known as Pinduoduo, the Dublin-registered company rebranded 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 substantial discounts.
In addition, PDD launched Temu in 2022. This is PDD’s online marketplace designed to serve international markets, particularly in North America. Temu has leveraged Pinduoduo’s business model and technological infrastructure. Temu’s success has been groundbreaking, attracting customers with competitive pricing.
Strangely, however, agriculture is the foundation of the company’s work. Through Pinduoduo, PDD has also made significant investments in agriculture, aiming to revolutionize the sector by connecting farmers directly with consumers. By reducing middlemen activity, the company says it delivers fresher produce and better prices for both parties.
The Impact of Temu on PDD
While PDD doesn’t break down revenue, given the attention the Temu app has received, it seems highly likely that Temu has become a major growth driver for the company. The North American-focused mobile app boasts more than 167 million monthly active users, and PDD’s post-Temu revenue growth has been very strong. The app was at the top of the download charts in 2023 and benefited from high-profile advertisements, including during the Super Bowl.
More generally, PDD has generated incredible growth since 2016 — when revenues were $73 million — through to 2023 — when revenues were $34.4 billion. The company’s earnings per share (EPS) have also expanded significantly since the launch of Temu from $3.99 in 2022 to $6.46 in 2023. From 2022 to 2023, PDD’s revenues expanded from $19 billion to $34.4 billion.
Also, Temu’s gross merchandise volume hit $15.1 billion in 2023, according to what I believe must be estimates, while sales are forecast to reach $37 billion in 2024. This forecast would suggest that Temu will represent more than half of PDD’s 2024 revenue.
PDD’s Earnings Forecast Is Hard to Believe
PDD’s growth trajectory remains impressive. Looking forward, revenue is expected to grow 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 falls dramatically from 27 to just three. Only one analyst is covering the stock until 2033, when they believe PDD will deliver $139.6 billion in revenue.
So, how does this translate into earnings? Well, for 2024, EPS is expected to come in at $11.75, and this then rises to $14.91 in 2025. For 2026, EPS is expected to come in at $17.96. This exceptional earnings growth appears to be largely due to Temu.
However, these forecasts could mean little if the regulatory or geopolitical environment takes a turn for the worse. U.S. political tensions with China have resulted in increased scrutiny of Chinese tech companies, and former President Donald Trump has proposed imposing high tariffs on Chinese goods, potentially in excess of 60%. This could affect PDD’s market activities in the U.S. if he returns to office.
Trump’s proposed measures are driven by a myriad of concerns, including data security and economic competition. It’s worth recognizing that such a move could have bipartisan support, reflecting tougher stances on Chinese technology firms and good manufacturers.
Based on the 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 seen as undervalued).
Is PDD Holdings Stock a Buy, According to Analysts?
On TipRanks, PDD comes in as a Strong Buy based on 13 Buys, zero Holds, and zero Sell ratings assigned by analysts in the past three months. The average PDD Holdings stock price target is $218.36, implying 65.5% upside potential.
The Bottom Line on PDD Holdings Stock
PDD Holdings has demonstrated incredible growth in recent years, and most analysts expect this to continue. Revenue is set to double over the medium term, while earnings are also on a strong upward path. It also appears to be overlooked, and this is demonstrated by its forward PEG ratio of 0.32x. However, I’m neutral because geopolitical events and more protectionist U.S. policy could put a halt to PDD’s success story.
