The management of PDD Holdings (PDD) warned investors about a tough road ahead, but could this actually be bullish for contrarian investors? When pessimism peaks and a company’s challenges are already known and priced in, it might be time for stock traders to consider making a move. Overall, I am bullish on PDD stock because the company’s actual results demonstrated rapid growth, and because management has already prepared the market for a bumpy ride.
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Shifting focus to the company’s core operations, PDD Holdings, which is based in China and is commonly referred to as PDD, owns an e-commerce platform called Pinduoduo. This platform sells a wide variety of items for the home and also offers groceries. Furthermore, PDD owns Temu, a platform where cheap (and often cheaply made) products are sold.
Despite these attributes, there’s no denying that PDD Holdings has to deal with significant competition from Alibaba (BABA) and, to a certain extent, from Amazon (AMZN). Nevertheless, Temu’s ultra-cheap products could entice shoppers from multiple continents, as inflation-weary consumers seek out bargains. Moreover, after Monday’s share-price collapse, PDD stock itself might be a prime bargain for bold, risk-tolerant discount hunters.
PDD Reports Phenomenal Top-Line and Bottom-Line Growth
To further support my bullish view on PDD Holdings, let’s consider the company’s ability to grow its sales and profits. PDD Holdings’ stock absolutely collapsed on Monday, slumping 29% and dipping below the key $100 level. Amazingly, this occurred after PDD revealed second-quarter financial results that look terrific, at least at first glance.
First of all, PDD’s revenue grew 86% year-over-year to around $13.36 billion (all figures are translated from RMB to U.S. dollars). That’s pretty impressive, wouldn’t you agree? Wall Street, however, wasn’t very impressed, since the analysts’ consensus estimate called for Q2-2024 revenue of $14.03 billion.
Maybe investors can overlook that bottom-line miss, as analysts sometimes set expectations too high for a company. There’s more news to report, though. Alarmingly, PDD Holdings’ total operating expenses grew 48% year-over-year to $4.24 billion, and the company’s total cost of revenue increased 80% to $4.64 billion.
Yet, despite the company’s increase in expenditures, PDD Holdings managed to deliver impressive bottom-line results. For one thing, PDD reported a 125% increase in adjusted (non-GAAP) net income attributable to ordinary shareholders, reaching $4.74 billion. Furthermore, PDD recorded adjusted earnings of $3.20 per share, a substantial increase compared to $1.45 per share in the same quarter last year.
Moreover, this bottom-line result beat the analysts’ consensus earnings estimate of $2.73 per share. This Street beat backs up my bullish stance on PDD Holdings stock, and it’s just as important as PDD’s revenue miss, in my opinion.
PDD’s Management Levels with Investors
When a company’s management levels with (or is frank and direct with) its investors, that’s commendable, but there can be short-term consequences. Specifically for PDD Holdings, the market didn’t want to hear what PDD’s management had to say about the company’s near-term challenges. Nevertheless, while it was a factor, I don’t believe that PDD Holdings’ Q2-2024 revenue miss was what prompted such a steep share-price sell-off. Despite this, I remain bullish on PDD Holdings because the company’s strong growth and promising long-term prospects outweigh the short-term concerns.
Instead, I suspect that short-term stock traders were bothered by the honest remarks of PDD Holdings VP of Finance Jun Liu. Liu warned, “Looking ahead, revenue growth will inevitably face pressure due to intensified competition and external challenges.” It’s worth noting that Liu was probably referring to Alibaba, and possibly Amazon as well, as PDD Holdings’ competition.
Furthermore, what “external challenges” was Liu talking about? The Wall Street Journal clarified that “consumers diverted their spending to experiences rather than material goods,” and China’s consumers “have been more willing to spend on dining out and entertainment as they pull back on purchasing material goods.” Naturally, that’s problematic for a product-sales-focused business like PDD Holdings.
Moreover, Liu cautioned, “Profitability will also likely be impacted as we continue to invest resolutely.” While this might concern some, short-term stock traders probably focused on this statement, though it’s not necessarily an indication of serious trouble for PDD Holdings. After all, sometimes it’s necessary for a business to invest in its future growth, even if this might dent the company’s near-term profits.
Is PDD Stock a Buy, According to Analysts?
On TipRanks, PDD is rated as a Strong Buy, based on eight Buys and two Holds assigned by analysts over the past three months. The average PDD Holdings stock price target is $185.78, implying an 89.9% upside potential from current levels.
If you’re wondering which analyst you should follow if you want to buy or sell PDD stock, the most profitable analyst covering the stock (on a one-year timeframe) is Elinor Leung of CLSA, with an average return of 91.69% per rating and an 80% success rate.
Conclusion: Should You Consider PDD Stock?
To conclude, the market reacted with fear and horror to Liu’s remarks, but now PDD Holdings’ near-term challenges might already be priced into the stock. This happens sometimes, as the market may punish a company for being up-front and honest. Given this, the current situation could present an opportunity for investors who can tolerate some risk.
Moreover, PDD Holdings beat Wall Street’s second-quarter earnings estimate, and the market is already braced for difficulties in the next quarter or two. Therefore, as a contrarian who likes to buy when others are selling, I would consider a small share position in PDD stock.
