Although Chinese e-commerce platforms like PDD Holdings (PDD) have managed to deliver robust returns for investors, this bullish narrative appears to be under significant threat. Following a tough outing during the second quarter, PDD stock suffered a severe correction. Not surprisingly, smart money appears skeptical about retail enterprises, making me neutral about investment. Still, even with this ambiguous framework, investors can generate income from the embattled company.
Q2 Earnings Imposed a Wakeup Call Against PDD Stock
Admittedly, prior to the e-commerce specialist’s most recent earnings disclosure, I disclosed a bullish assessment in other financial publications. However, the less-than-robust results in Q2 forced me to respect the present narrative. Therefore, a neutral sentiment seems most appropriate.
As TipRanks reporter Shrilekha Pethe mentioned, PDD stock tanked following the online retailer’s financial report. Yes, the company’s revenue shot up by 86% year-over-year to RMB97.06 billion (or $13.35 billion). Unfortunately, this figure fell short of the consensus estimate of $14.04 billion.
As Pethe explained, “This shortfall in revenues was compounded by the company’s increase in operating expenses, which ballooned by 48% year-over-year to RMB30.79 billion ($4.23 billion). The rise in operating expenses was driven by increased investments in marketing, advertising, and promotions to attract shoppers.”
In fairness, PDD stock wasn’t completely devoid of positives during Q2. The e-commerce specialist posted adjusted diluted earnings per American Depositary Shares (ADS) of RMB23.24 or $3.20, beating the consensus target of $2.86.
Still, what likely distracted onlookers was the magnitude of the Q2 earnings surprise, which was noticeably lower than the results in the past three quarters. Combined with the revenue shortfall, investors quickly exited from PDD stock.
Making matters worse, Pethe noted, “China’s fragile economy, coupled with ongoing struggles in the property sector and high unemployment rates, have led consumers to reduce spending.” Of course, it’s true that the underlying platform – which specializes in low prices and big discounts across a wide range of product categories – has attracted budget-conscious shoppers.
Unfortunately, China’s broader retail machinery is feeling the heat. Moreover, PDD’s leadership team acknowledged the challenges, disclosing that “revenue growth will inevitably face pressure due to intensified competition and external challenges.”
With statements like that, it’s no wonder that PDD stock crashed. At the same time, Wall Street analysts are targeting fiscal 2024 revenue to land on average at $57.41 billion. If so, that would represent a 64.8% lift from last year.
So, we have a situation where PDD stock features both positive and negative catalysts; hence, the aforementioned neutral sentiment. Nevertheless, even with this ambiguity, you can still profit from this setup.
A Bear Call Spread Makes PDD Holdings Quite Intriguing
Although there are competing catalysts vying for control of PDD stock, the smart money seems net bearish on the underlying enterprise. Indeed, TipRanks’ unusual options activity screener shows that in the aftermath of the Q2 earnings report, most of the transactions in the derivatives market carried pessimistic sentiment.
Nevertheless, there’s a case to be made that PDD stock won’t entirely collapse. Again, analysts believe that the company will enjoy strong growth this fiscal year. So, two outcomes may be in play: either the security falls from here or moves sideways. If you believe in such an outcome, a bull call spread may be an enticing idea.
Rather than betting on a specific direction, a call spread wagers that the target security will not rise above a predefined breakeven price. To achieve this result, a trader sells a call option with a strike price higher than the current market price. On the other end of the transaction, the call buyer pays the seller the premium for the contract.
Obviously, selling a call option without owning the underlying security is risky if the underlying security’s price rises. To cap this risk, the trader also buys a call option with a strike price above the sold call. This way, the contractual obligation of the sold call is counteracted by the purchase of a call.
Let’s assume you want to generate quick income over the next two weeks. You may sell the PDD call expiring Sept. 13, 2024, at a bid of $1.27. At the same time, you buy the same-expiry call but with a strike price of $105 at an ask of 60 cents. The net premium collected is the difference between the two metrics multiplied by 100 shares or $67.
Furthermore, the maximum loss of this trade is defined as the difference between the strike prices minus the net premium collected, multiplied by 100 shares or $433. Finally, the breakeven price for this trade is $100.67. For the next two weeks, PDD stock must not rise above this point.
Keep in mind that this is not the only combo available. Rather, you can play around with the strike prices and net premiums to achieve a risk-reward profile you’re most comfortable with.
Wall Street’s Take on PDD Holdings
Turning to Wall Street, PDD stock has a Strong Buy consensus rating based on 11 Buys, two Holds, and zero Sell ratings. The average PDD price target is $166.58, implying 73.32% upside potential.
The Takeaway
While PDD Holdings has been a strong performer in the past, its most recent earnings disclosure left investors with a bad taste in their mouths. A sales miss combined with questions about China’s economy saw PDD stock incur a steep correction. Still, analysts anticipate strong growth this year, forcing a neutral framework with a hint of pessimism. This opens the door for the bull call spread, an options strategy that allows investors to profit from an entity’s sideways movement. Therefore, I am neutral on PDD stock.
