PDD Holdings (PDD) offers high-growth exposure to China alongside significant undervaluation. As a leader in e-commerce, it operates the renowned Pinduoduo platform in Asia and Temu in the West. Wall Street’s average 12-month price target suggests around a 50% upside, while my analysis estimates a 50% compound annual growth rate (CAGR) in enterprise value (EV) over the next two years. I remain highly bullish on this investment.
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High Growth and a Great Valuation
I’m particularly bullish on PDD Holdings because it boasts an impressive five-year revenue growth average of 81%, far surpassing competitors like JD.com (JD), which has a five-year average growth rate of 18.7%. This growth justifies its higher forward EV-to-sales ratio of 1.77x compared to JD’s 0.29x, without suggesting overvaluation.
While the sector median forward EV-to-sales ratio is 1.34x, the sector’s median forward revenue growth rate is only 3.07%—a stark contrast to PDD’s 54.3%. This indicates that PDD Holdings stock is significantly undervalued relative to its growth potential. By comparison, JD.com, despite being priced at less than one-third of its revenues, has a much lower forward revenue growth rate of just 3.38%.
With $90 billion in revenue and a stable 29% EBITDA margin by December 2026, I project PDD Holdings will achieve $26.1 billion in EBITDA (earnings before interest, tax, depreciation, and amortization). Using a conservative EV-to-EBITDA multiple of 8.5x (below the current 8.79x), my forecast for PDD’s enterprise value is $221.85 billion. With a current enterprise value of $97.32 billion, this implies a 48.5% CAGR from November 2024 to December 2026.
Pinduoduo generates about 90% of PDD Holdings’ revenue, meaning most of its income comes from China and is unaffected by Trump-era tariffs. For the smaller portion of revenue from Temu’s Western sales, the impact of tariffs is minimal due to the de minimis threshold, which exempts goods valued under $800 from the U.S. tariffs.
The Long-Term Presents More Risks for PDD Stock
While I remain bullish on PDD stock, a significant part of its investment appeal lies in its current undervaluation, which means risks increase if the stock approaches fair value. China’s slowing economic growth, driven by challenges like high youth unemployment and a property sector crisis, could hinder revenue growth. Additionally, while Temu’s rapid expansion in the U.S. highlights promising growth potential, it faces stiff competition from established Western giants such as Amazon (AMZN).
Moreover, Chinese stock markets are generally more volatile than Western stock markets, and this higher volatility extends to Chinese American Depositary Receipts like PDD Holdings. As the Chinese government has significant control over its financial markets, policy-driven interventions can lead to abrupt changes in market sentiment. This is why I prefer PDD as a short-term value investment than a long-term holding.
If the investment remains stable over the next five years, I estimate total revenue will reach $117.5 billion. Using a conservative EV-to-sales ratio of 3.0x, higher than the current 1.84x but well below the five-year average of 9.0x, the enterprise value is projected to grow to $352.5 billion. This represents a CAGR of 28.8% from the current enterprise value of $97.32 billion between November 2024 and December 2029.
PDD’s Strategic Investments Could Delay Growth
There’s certainly merit to the bull thesis of holding PDD stock for the long term. The company is prioritizing long-term growth over short-term profitability by making substantial investments to strengthen its platform. Management is actively supporting high-quality merchants and enhancing the overall ecosystem by implementing measures such as service fee refunds, deferred fee reductions, and lower security deposit requirements.
However, if these strategic initiatives are scaled up further, the company’s valuation growth may be slower than anticipated in my two-year and five-year valuation models. This could result from reduced profitability and revenue growth in the short term, driven by these deliberate, sentiment-driven, and long-term investments.
Macroeconomics Should be Taken into Consideration
PDD Holdings presents a compelling investment opportunity for a two-year or longer horizon. However, I’m opting for a conservative portfolio weighting due to prevailing geopolitical risks. Historically, during periods of significant conflict, stock markets often experience prolonged downturns. Should China proceed with an invasion of Taiwan, it could result in severe and potentially irreversible losses for both Western and Chinese equities, including PDD Holdings, over a multi-decade timeframe.
To mitigate these risks, I have modeled my long-term portfolio with a cautious allocation: 50% in bonds, 40% in stocks, and 10% in gold. In uncertain times, a conservative approach to prioritizing risk management is more prudent than an aggressive investment strategy.
Is PDD Stock a Buy, According to Analysts?
Turning to Wall Street, PDD stock scores a Moderate Buy consensus rating. This is based on nine Buy ratings, five Holds, and one Sell recommendation. The average PDD stock price target of $146.79 indicates a nearly 49% upside potential over the next 12 months.
This further supports my thesis that PDD Holdings is a shrewd short-term investment.
Conclusion: PDD Is Worth Buying for a Risk-Mitigated Portfolio
Given that I forecast nearly a 50% compound annual growth rate in PDD Holdings’ enterprise value over the next two years, it is certainly a strong investment. However, this does not mean it is prudent to take on excessive risk. Setting a take-profit target of $215 for PDD stock could be a wise decision, considering the long-term uncertainties associated with Chinese policy that could affect the investment.
