PDD Holdings' Chess Move: Sacrificing Margins To Checkmate Alibaba

seekingalpha08-28

PDD's Q2 earnings report revealed a shift toward high-quality brands, leading to a 30% stock price drop due to long-term margin concerns and no share buybacks.Despite market confusion, PDD's non-GAAP ...

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Comments

股勇者
08-28
股勇者
Perception is everything. PDD is positioned for cheap n low quality products at the lowest cost possible. It will not be able to challenge Alibaba or JD for china market, and Amazon for US market.
Dont be weak
08-28
Dont be weak
Sacrificing margins to compete with Alibaba just means that you are not on the same level. Still want to checkmate. Checkmate yourself
lucasL
08-28
lucasL
Too much optimism over PDD. Alibaba is way strong in it's portfolio than PDD.

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href=https://seekingalpha.com/article/4717329-pdd-holdings-chess-move-sacrificing-margins-to-checkmate-alibaba><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>PDD's Q2 earnings report revealed a shift toward high-quality brands, leading to a 30% stock price drop due to long-term margin concerns and no share buybacks.Despite market confusion, PDD's non-GAAP ...</p>\n\n<a href=\"https://seekingalpha.com/article/4717329-pdd-holdings-chess-move-sacrificing-margins-to-checkmate-alibaba\">Source 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Hirokawa/DigitalVision via Getty ImagesIntroductionPDD Holdings' (NASDAQ:PDD) negative comments about its long-term profitability forecast, the unpredictability of geopolitical conflict, and the absence of a shareholder buyout surprised the market when the company released its Q2 earnings today. As a result, after the earnings, the stock price fell by 30%.We published an article titled \"PDD Holdings Challenge To Alibaba's Reign\" in November 2023. We think the moment is probably near after examining its finances, the dynamics of its competitors, and the management's remarks. We will explain it in the sections that follow, and look more closely at each of the aforementioned issues separately.Change in Long-Term Profitability OutlookShift in Business ModelAs a result of its efforts to invest in the supply chain and reduce transaction fees for merchants who carry premium brands, management anticipates a long-term drop in the company's margin.Some background information for investors:large brands like Nike, Apple, and others are referred to as high-quality brand merchants;PDD is well-known for offering affordable white-label products;PDD's main source of income is the sale of advertising to these white-label brands.Therefore, PDD's decision to concentrate on high-quality brands indicates that it will lower its support for while-label brand merchants and concentrate on large brand merchants. This initiative could therefore suggest a total overhaul of the business paradigm as it creates a conflict of interest for its while-label brand merchants. As a result, there is a lot of uncertainty in the market regarding the timing and outcome of this transition.Q2 Financial PerformancePD reported an 86% increase in revenues and a 156% increase in operating profits in its Q2 financial report. The revenue growth rate from transaction services and online marketing services both decreased from the previous quarter. This probably reflects management's decision to forego the white-label brand in favor of investing in a high-quality brand. Therefore, the market is confused about where the company is going.Strategic ImplicationsInvestors should, nevertheless, use common sense and realize that if the business is riding high, there should be no reason to let it go.When comparing PDD's success to that of Alibaba (BABA), the whole picture becomes more evident. Over the past few quarters, PDD has increased its margin while Alibaba has remained silent. Nonetheless, PDD's non-GAAP operating margin climbed to 36% (calculated from its earnings reports) in Q2 2024 from 32.8% in Q1, above the EBITDA margin of 31.6% (calculated from its earnings reports) for Alibaba's commerce group (Taobao, TMall, and International Digital Commerce Group only) in this quarter.P.S. Due to its low amortization and depreciation costs, PDD's non-GAAP operating margin is comparable to Alibaba's EBITDA margin.Because PDD currently has a larger margin than Alibaba, PDD now has a margin advantage to compete on price over Alibaba. Furthermore, PDD's advantage against Alibaba in terms of commerce revenues was further reduced. With revenues of just 68% of Alibaba's, it expanded at a rate of 86% year over year. PDD has a good performance when compared to Alibaba's commerce group growth, which is 4% year over year.With its double investment in price, PDD has a good possibility of surpassing Alibaba in a few quarters if all goes according to plan. Thus, it makes sense to comprehend management's choice this quarter from these angles. Thus, we interpret the PDD management's statement as an aggressive attempt to go after Alibaba rather than changes in its business model.Geopolitical Risk and Investment StrategyThere is indeed some degree of geopolitical risk uncertainty since developing nations may impose higher taxes on cheap goods imported from China. Nonetheless, management chose to raise rather than decrease investment, citing their belief that present investment rewards outweigh overall risk factors.Early Indicators of SuccessThe management gave investors some very insightful numbers, albeit sparingly, stating that they had seen early indications of the strategies' potential for success.The number of new merchants and new products support our platforms saw meaningful growth. In the first week of June 18, the number of merchants participating in the 10 Billion Program grew by over 90% year-on-year, and the number of agricultural merchants increased by 83% year-on-year. Our platform also attracted a great number of new merchants in categories such as electronics, home appliances and cosmetics.If they are successful in adding additional merchants to the platform, it appears to us that the business is expanding rather than experiencing significant challenges. And if the management is indeed confident in its actions, then holding back on buybacks now makes sense. Even though it is true that a lack of buybacks makes investing in PDD shares less appealing. While we are not happy with their investor communications, we would rather see management properly designated for long-term priorities.Financial Management and Cash ReservesWe do believe that PDD used conservative financial management, based on its historical track records. PDD kept increasing its cash reserves. PDD was close to Alibaba's $61 billion in cash and cash equivalent, with $38 billion in cash and cash equivalent on hand and just $720 million in convertible debt. This indicates to us that PDD is prepared for battle.ValuationBase CaseWe revise our DCF model in light of its most recent financial data.PDD is currently a highly successful and competitive business. In the worst scenario, PDD has to return to concentrating on white-label merchants since it is unable to draw in enough high-caliber brands. We believe that PDD has enough time to swiftly modify its strategy if things don't go according to plan, especially considering the size of its current user base.Despite that, we still believe the company should continue to grow and eventually challenge Alibaba long term. However, for conservative reasons, we assume that the company will only grow by 3% annually after 2024 and will eventually maintain a free cash flow margin of 32%. This indicates that if investors purchase at the current price, there is a 48% upside. (see below chart)DCF valuation (LEL)Bear CaseTo evaluate its valuation under various long-term free cash margin and terminal growth rate scenarios, we have performed a sensitivity analysis.In the bear case, we assume that the company was subject to intense competition risk, failed to grow at a rate greater than 3% per year, and saw a decrease in its margin as a result.It demonstrates that the stock return has a 14%-28% upside (see below chart) from the current price, even if the company faced a major obstacle and had to lower its free cash flow margin to a level of 20%-25%.Sensitivity test (LEL)Bull CaseFor the bull case, we still believe the company should continue to grow and eventually challenge Alibaba long-term. Based on various terminal growth rate estimates, the stock return potential increases to 48%-129% (see below chart), as long as the company can maintain its present margin and sustain growth of more than 3% annually.Sensitivity test (LEL)As a result, it seems that the upside risk is greater than the downside risk in both scenarios. In our opinion, the stock was considerably oversold following today's earnings. We are a buyer at the current price.Risk FactorsPDD has a track record of neither paying dividends nor buying back stock from shareholders. This strikes us as a lack of dedication to generating shareholder returns. Given that the majority of PDD's assets are located in China's main territory, there is a considerable regulatory risk that future dividend distribution to investors may be restricted. Consequently, stock price appreciation may be the only source of profit for investors. Furthermore, to us, PDD's business model paradigm shift risk is greater than geopolitical or regulatory risk. Alibaba's rapid expenditure in its overseas operations is indicative of its fierce response to the price war. Consequently, there's no assurance that PDD will be able to easily pass Alibaba in the next quarters.ConclusionInvestors were undoubtedly alarmed by management's remarks about long-term margin shrinkage, business model changes, and the absence of share buybacks. But if we sit down with management, we should realize that PDD currently has a leading margin and momentum, and now is the moment when it could be able to overtake Alibaba. Our sensitivity test indicates that the upside reward more than offsets the downside risk. Consequently, we believe that fear has caused the stock to be oversold at this time. We maintain our strong buy rating as a consequence.","kind":"highlight","is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[{"id":343254394343656,"gmtCreate":1724820706359,"gmtModify":1724820711484,"author":{"id":"3569231041389085","authorId":"3569231041389085","name":"股勇者","avatar":"https://community-static.tradeup.com/news/3e504cb82a63c1bce1ad9b0dc5eacf75","vip":1,"hat":"https://static.tigerbbs.com/f84d87792f02cf78e80ee34979fd31e5","crmLevel":5,"crmLevelSwitch":1,"idStr":"3569231041389085","authorIdStr":"3569231041389085"},"htmlText":"Perception is everything. PDD is positioned&nbsp;for cheap n low quality products at the lowest cost possible. It will not be able to challenge Alibaba or JD for china market, and Amazon for US market.","listText":"Perception is everything. PDD is positioned&nbsp;for cheap n low quality products at the lowest cost possible. It will not be able to challenge Alibaba or JD for china market, and Amazon for US market.","text":"Perception is everything. PDD is positioned for cheap n low quality products at the lowest cost possible. It will not be able to challenge Alibaba or JD for china market, and Amazon for US market.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/343254394343656","repostId":2462019382,"repostType":4,"repost":{"id":"2462019382","kind":"highlight","pubTimestamp":1724812860,"share":"https://ttm.financial/m/news/2462019382?lang=&edition=fundamental","pubTime":"2024-08-28 10:41","market":"nz","language":"en","title":"PDD Holdings' Chess Move: Sacrificing Margins To Checkmate Alibaba","url":"https://stock-news.laohu8.com/highlight/detail?id=2462019382","media":"seekingalpha","summary":"PDD's Q2 earnings report revealed a shift toward high-quality brands, leading to a 30% stock price drop due to long-term margin concerns and no share buybacks.Despite market confusion, PDD's non-GAAP ","content":"<html><head></head><body><ul style=\"\"><li><p>PDD&#39;s Q2 earnings report revealed a shift toward high-quality brands, leading to a 30% stock price drop due to long-term margin concerns and no share buybacks.</p></li><li><p>Despite market confusion, PDD&#39;s non-GAAP operating margin surpassed Alibaba&#39;s, suggesting a strategic move to challenge Alibaba&#39;s dominance soon.</p></li><li><p>Management&#39;s confidence in their strategy is evident from increased merchant participation and cash reserves, indicating readiness for competitive challenges.</p></li><li><p>Sensitivity analysis shows significant upside potential, with a 48%-129% return in the bull case, making the stock a strong buy despite current fears.</p></li></ul><p></p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/fb880a20de01c703a6291d1ef688ff42\" tg-width=\"750\" tg-height=\"500\"/></p><p>Yoshiyoshi Hirokawa/DigitalVision via Getty Images</p><p></p><h2 id=\"id_3386954823\">Introduction</h2><p>PDD Holdings&#39; (NASDAQ:PDD) negative comments about its long-term profitability forecast, the unpredictability of geopolitical conflict, and the absence of a shareholder buyout surprised the market when the company released its Q2 earnings today. As a result, after the earnings, the stock price fell by 30%.</p><p>We published an article titled &#34;PDD Holdings Challenge To Alibaba&#39;s Reign&#34; in November 2023. We think the moment is probably near after examining its finances, the dynamics of its competitors, and the management&#39;s remarks. We will explain it in the sections that follow, and look more closely at each of the aforementioned issues separately.</p><h2 id=\"id_336546728\">Change in Long-Term Profitability Outlook</h2><h3 id=\"id_2605617804\">Shift in Business Model</h3><p>As a result of its efforts to invest in the supply chain and reduce transaction fees for merchants who carry premium brands, management anticipates a long-term drop in the company&#39;s margin.</p><p>Some background information for investors:</p><ol start=\"1\" style=\"\"><li><p>large brands like Nike, Apple, and others are referred to as high-quality brand merchants;</p></li><li><p>PDD is well-known for offering affordable white-label products;</p></li><li><p>PDD&#39;s main source of income is the sale of advertising to these white-label brands.</p></li></ol><p>Therefore, PDD&#39;s decision to concentrate on high-quality brands indicates that it will lower its support for while-label brand merchants and concentrate on large brand merchants. This initiative could therefore suggest a total overhaul of the business paradigm as it creates a conflict of interest for its while-label brand merchants. As a result, there is a lot of uncertainty in the market regarding the timing and outcome of this transition.</p><h3 id=\"id_177266955\">Q2 Financial Performance</h3><p>PD reported an 86% increase in revenues and a 156% increase in operating profits in its Q2 financial report. The revenue growth rate from transaction services and online marketing services both decreased from the previous quarter. This probably reflects management&#39;s decision to forego the white-label brand in favor of investing in a high-quality brand. Therefore, the market is confused about where the company is going.</p><h3 id=\"id_1134731684\">Strategic Implications</h3><p>Investors should, nevertheless, use common sense and realize that if the business is riding high, there should be no reason to let it go.</p><p>When comparing PDD&#39;s success to that of Alibaba (BABA), the whole picture becomes more evident. Over the past few quarters, PDD has increased its margin while Alibaba has remained silent. Nonetheless, PDD&#39;s non-GAAP operating margin climbed to 36% (calculated from its earnings reports) in Q2 2024 from 32.8% in Q1, above the EBITDA margin of 31.6% (calculated from its earnings reports) for Alibaba&#39;s commerce group (Taobao, TMall, and International Digital Commerce Group only) in this quarter.</p><p>P.S. Due to its low amortization and depreciation costs, PDD&#39;s non-GAAP operating margin is comparable to Alibaba&#39;s EBITDA margin.</p><p>Because PDD currently has a larger margin than Alibaba, PDD now has a margin advantage to compete on price over Alibaba. Furthermore, PDD&#39;s advantage against Alibaba in terms of commerce revenues was further reduced. With revenues of just 68% of Alibaba&#39;s, it expanded at a rate of 86% year over year. PDD has a good performance when compared to Alibaba&#39;s commerce group growth, which is 4% year over year.</p><p>With its double investment in price, PDD has a good possibility of surpassing Alibaba in a few quarters if all goes according to plan. Thus, it makes sense to comprehend management&#39;s choice this quarter from these angles. Thus, we interpret the PDD management&#39;s statement as an aggressive attempt to go after Alibaba rather than changes in its business model.</p><h2 id=\"id_596810965\">Geopolitical Risk and Investment Strategy</h2><p>There is indeed some degree of geopolitical risk uncertainty since developing nations may impose higher taxes on cheap goods imported from China. Nonetheless, management chose to raise rather than decrease investment, citing their belief that present investment rewards outweigh overall risk factors.</p><h3 id=\"id_681780368\">Early Indicators of Success</h3><p>The management gave investors some very insightful numbers, albeit sparingly, stating that they had seen early indications of the strategies&#39; potential for success.</p><blockquote><p>The number of new merchants and new products support our platforms saw meaningful growth. In the first week of June 18, the number of merchants participating in the 10 Billion Program grew by over 90% year-on-year, and the number of agricultural merchants increased by 83% year-on-year. Our platform also attracted a great number of new merchants in categories such as electronics, home appliances and cosmetics.</p></blockquote><p>If they are successful in adding additional merchants to the platform, it appears to us that the business is expanding rather than experiencing significant challenges. And if the management is indeed confident in its actions, then holding back on buybacks now makes sense. Even though it is true that a lack of buybacks makes investing in PDD shares less appealing. While we are not happy with their investor communications, we would rather see management properly designated for long-term priorities.</p><h3 id=\"id_4203036130\">Financial Management and Cash Reserves</h3><p>We do believe that PDD used conservative financial management, based on its historical track records. PDD kept increasing its cash reserves. PDD was close to Alibaba&#39;s $61 billion in cash and cash equivalent, with $38 billion in cash and cash equivalent on hand and just $720 million in convertible debt. This indicates to us that PDD is prepared for battle.</p><h2 id=\"id_1006610899\">Valuation</h2><h3 id=\"id_2864969942\">Base Case</h3><p>We revise our DCF model in light of its most recent financial data.</p><p>PDD is currently a highly successful and competitive business. In the worst scenario, PDD has to return to concentrating on white-label merchants since it is unable to draw in enough high-caliber brands. We believe that PDD has enough time to swiftly modify its strategy if things don&#39;t go according to plan, especially considering the size of its current user base.</p><p>Despite that, we still believe the company should continue to grow and eventually challenge Alibaba long term. However, for conservative reasons, we assume that the company will only grow by 3% annually after 2024 and will eventually maintain a free cash flow margin of 32%. This indicates that if investors purchase at the current price, there is a 48% upside. (see below chart)</p><p></p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/bc367f09bc0f43756a746cddf4c7aeb3\" tg-width=\"610\" tg-height=\"108\"/></p><p>DCF valuation (LEL)</p><p></p><h3 id=\"id_668999533\">Bear Case</h3><p>To evaluate its valuation under various long-term free cash margin and terminal growth rate scenarios, we have performed a sensitivity analysis.</p><p>In the bear case, we assume that the company was subject to intense competition risk, failed to grow at a rate greater than 3% per year, and saw a decrease in its margin as a result.</p><p>It demonstrates that the stock return has a 14%-28% upside (see below chart) from the current price, even if the company faced a major obstacle and had to lower its free cash flow margin to a level of 20%-25%.</p><p></p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/c9d5ab4464139ecf8bd63f933ac1d8e3\" tg-width=\"640\" tg-height=\"128\"/></p><p>Sensitivity test (LEL)</p><p></p><h3 id=\"id_4063060221\">Bull Case</h3><p>For the bull case, we still believe the company should continue to grow and eventually challenge Alibaba long-term. Based on various terminal growth rate estimates, the stock return potential increases to 48%-129% (see below chart), as long as the company can maintain its present margin and sustain growth of more than 3% annually.</p><p></p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/3ac7972bc43143ae957f3befda542472\" tg-width=\"640\" tg-height=\"125\"/></p><p>Sensitivity test (LEL)</p><p></p><p>As a result, it seems that the upside risk is greater than the downside risk in both scenarios. In our opinion, the stock was considerably oversold following today&#39;s earnings. We are a buyer at the current price.</p><h2 id=\"id_3404590141\">Risk Factors</h2><p>PDD has a track record of neither paying dividends nor buying back stock from shareholders. This strikes us as a lack of dedication to generating shareholder returns. Given that the majority of PDD&#39;s assets are located in China&#39;s main territory, there is a considerable regulatory risk that future dividend distribution to investors may be restricted. Consequently, stock price appreciation may be the only source of profit for investors. Furthermore, to us, PDD&#39;s business model paradigm shift risk is greater than geopolitical or regulatory risk. Alibaba&#39;s rapid expenditure in its overseas operations is indicative of its fierce response to the price war. Consequently, there&#39;s no assurance that PDD will be able to easily pass Alibaba in the next quarters.</p><h2 id=\"id_2987798804\">Conclusion</h2><p>Investors were undoubtedly alarmed by management&#39;s remarks about long-term margin shrinkage, business model changes, and the absence of share buybacks. But if we sit down with management, we should realize that PDD currently has a leading margin and momentum, and now is the moment when it could be able to overtake Alibaba. Our sensitivity test indicates that the upside reward more than offsets the downside risk. Consequently, we believe that fear has caused the stock to be oversold at this time. We maintain our strong buy rating as a consequence.</p></body></html>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>PDD Holdings' Chess Move: Sacrificing Margins To Checkmate Alibaba</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nPDD Holdings' Chess Move: Sacrificing Margins To Checkmate Alibaba\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-28 10:41 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4717329-pdd-holdings-chess-move-sacrificing-margins-to-checkmate-alibaba><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>PDD's Q2 earnings report revealed a shift toward high-quality brands, leading to a 30% stock price drop due to long-term margin concerns and no share buybacks.Despite market confusion, PDD's non-GAAP ...</p>\n\n<a href=\"https://seekingalpha.com/article/4717329-pdd-holdings-chess-move-sacrificing-margins-to-checkmate-alibaba\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"BABA":"阿里巴巴","PDD":"拼多多","LU0501845795.SGD":"瑞银大中华区股票基金P Acc SGD","LU0293314216.USD":"ALLIANZ GEM EQUITY HIGH DIVIDEND \"A\" (USD) ACC","IE0032431581.USD":"PINEBRIDGE GREATER CHINA EQUITY \"A\" (USD) ACC","BK1608":"元宇宙概念","LU0143863784.USD":"CT (LUX) I GLOBAL EMERGING MARKET EQUITIES\"DU\" (USD) ACC","BK4554":"元宇宙及AR概念","IE0034224299.USD":"PINEBRIDGE ASIA EX JAPAN EQUITY \"A\" (USD) ACC","BK4553":"喜马拉雅资本持仓","LU0072913022.USD":"UBS (LUX) EQUITY FUND - 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Templeton China A Acc SGD","LU0164880469.USD":"HSBC GIF HONG KONG EQUITY \"AC\" ACC","LU0128522744.USD":"TEMPLETON EMERGING MARKETS \"A\" ACC","LU1880383366.USD":"东方汇理中国股票基金 A2 (C)","LU0106959298.USD":"UBS (LUX) EQUITY FUND - EMERGING MARKETS SUSTAINABLE LEADERS (USD) \"P\" (USD) ACC","LU0359201612.USD":"贝莱德中国基金A2","LU0359202008.SGD":"Blackrock China Fund A2 SGD-H","LU0229945570.USD":"TEMPLETON BRIC \"A\" (USD) ACC","LU0359201885.HKD":"BGF CHINA \"A2\" (HKD) ACC","LU0054237671.USD":"FIDELITY ASIAN SPECIAL SITUATIONS \"A\" INC","BK4548":"巴美列捷福持仓","LU0880133367.SGD":"UBS (LUX) EQUITY FUND CHINA OPPORTUNITY USD \"P\" (SGD) ACC"},"source_url":"https://seekingalpha.com/article/4717329-pdd-holdings-chess-move-sacrificing-margins-to-checkmate-alibaba","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"2462019382","content_text":"PDD's Q2 earnings report revealed a shift toward high-quality brands, leading to a 30% stock price drop due to long-term margin concerns and no share buybacks.Despite market confusion, PDD's non-GAAP operating margin surpassed Alibaba's, suggesting a strategic move to challenge Alibaba's dominance soon.Management's confidence in their strategy is evident from increased merchant participation and cash reserves, indicating readiness for competitive challenges.Sensitivity analysis shows significant upside potential, with a 48%-129% return in the bull case, making the stock a strong buy despite current fears.Yoshiyoshi Hirokawa/DigitalVision via Getty ImagesIntroductionPDD Holdings' (NASDAQ:PDD) negative comments about its long-term profitability forecast, the unpredictability of geopolitical conflict, and the absence of a shareholder buyout surprised the market when the company released its Q2 earnings today. As a result, after the earnings, the stock price fell by 30%.We published an article titled \"PDD Holdings Challenge To Alibaba's Reign\" in November 2023. We think the moment is probably near after examining its finances, the dynamics of its competitors, and the management's remarks. We will explain it in the sections that follow, and look more closely at each of the aforementioned issues separately.Change in Long-Term Profitability OutlookShift in Business ModelAs a result of its efforts to invest in the supply chain and reduce transaction fees for merchants who carry premium brands, management anticipates a long-term drop in the company's margin.Some background information for investors:large brands like Nike, Apple, and others are referred to as high-quality brand merchants;PDD is well-known for offering affordable white-label products;PDD's main source of income is the sale of advertising to these white-label brands.Therefore, PDD's decision to concentrate on high-quality brands indicates that it will lower its support for while-label brand merchants and concentrate on large brand merchants. This initiative could therefore suggest a total overhaul of the business paradigm as it creates a conflict of interest for its while-label brand merchants. As a result, there is a lot of uncertainty in the market regarding the timing and outcome of this transition.Q2 Financial PerformancePD reported an 86% increase in revenues and a 156% increase in operating profits in its Q2 financial report. The revenue growth rate from transaction services and online marketing services both decreased from the previous quarter. This probably reflects management's decision to forego the white-label brand in favor of investing in a high-quality brand. Therefore, the market is confused about where the company is going.Strategic ImplicationsInvestors should, nevertheless, use common sense and realize that if the business is riding high, there should be no reason to let it go.When comparing PDD's success to that of Alibaba (BABA), the whole picture becomes more evident. Over the past few quarters, PDD has increased its margin while Alibaba has remained silent. Nonetheless, PDD's non-GAAP operating margin climbed to 36% (calculated from its earnings reports) in Q2 2024 from 32.8% in Q1, above the EBITDA margin of 31.6% (calculated from its earnings reports) for Alibaba's commerce group (Taobao, TMall, and International Digital Commerce Group only) in this quarter.P.S. Due to its low amortization and depreciation costs, PDD's non-GAAP operating margin is comparable to Alibaba's EBITDA margin.Because PDD currently has a larger margin than Alibaba, PDD now has a margin advantage to compete on price over Alibaba. Furthermore, PDD's advantage against Alibaba in terms of commerce revenues was further reduced. With revenues of just 68% of Alibaba's, it expanded at a rate of 86% year over year. PDD has a good performance when compared to Alibaba's commerce group growth, which is 4% year over year.With its double investment in price, PDD has a good possibility of surpassing Alibaba in a few quarters if all goes according to plan. Thus, it makes sense to comprehend management's choice this quarter from these angles. Thus, we interpret the PDD management's statement as an aggressive attempt to go after Alibaba rather than changes in its business model.Geopolitical Risk and Investment StrategyThere is indeed some degree of geopolitical risk uncertainty since developing nations may impose higher taxes on cheap goods imported from China. Nonetheless, management chose to raise rather than decrease investment, citing their belief that present investment rewards outweigh overall risk factors.Early Indicators of SuccessThe management gave investors some very insightful numbers, albeit sparingly, stating that they had seen early indications of the strategies' potential for success.The number of new merchants and new products support our platforms saw meaningful growth. In the first week of June 18, the number of merchants participating in the 10 Billion Program grew by over 90% year-on-year, and the number of agricultural merchants increased by 83% year-on-year. Our platform also attracted a great number of new merchants in categories such as electronics, home appliances and cosmetics.If they are successful in adding additional merchants to the platform, it appears to us that the business is expanding rather than experiencing significant challenges. And if the management is indeed confident in its actions, then holding back on buybacks now makes sense. Even though it is true that a lack of buybacks makes investing in PDD shares less appealing. While we are not happy with their investor communications, we would rather see management properly designated for long-term priorities.Financial Management and Cash ReservesWe do believe that PDD used conservative financial management, based on its historical track records. PDD kept increasing its cash reserves. PDD was close to Alibaba's $61 billion in cash and cash equivalent, with $38 billion in cash and cash equivalent on hand and just $720 million in convertible debt. This indicates to us that PDD is prepared for battle.ValuationBase CaseWe revise our DCF model in light of its most recent financial data.PDD is currently a highly successful and competitive business. In the worst scenario, PDD has to return to concentrating on white-label merchants since it is unable to draw in enough high-caliber brands. We believe that PDD has enough time to swiftly modify its strategy if things don't go according to plan, especially considering the size of its current user base.Despite that, we still believe the company should continue to grow and eventually challenge Alibaba long term. However, for conservative reasons, we assume that the company will only grow by 3% annually after 2024 and will eventually maintain a free cash flow margin of 32%. This indicates that if investors purchase at the current price, there is a 48% upside. (see below chart)DCF valuation (LEL)Bear CaseTo evaluate its valuation under various long-term free cash margin and terminal growth rate scenarios, we have performed a sensitivity analysis.In the bear case, we assume that the company was subject to intense competition risk, failed to grow at a rate greater than 3% per year, and saw a decrease in its margin as a result.It demonstrates that the stock return has a 14%-28% upside (see below chart) from the current price, even if the company faced a major obstacle and had to lower its free cash flow margin to a level of 20%-25%.Sensitivity test (LEL)Bull CaseFor the bull case, we still believe the company should continue to grow and eventually challenge Alibaba long-term. Based on various terminal growth rate estimates, the stock return potential increases to 48%-129% (see below chart), as long as the company can maintain its present margin and sustain growth of more than 3% annually.Sensitivity test (LEL)As a result, it seems that the upside risk is greater than the downside risk in both scenarios. In our opinion, the stock was considerably oversold following today's earnings. We are a buyer at the current price.Risk FactorsPDD has a track record of neither paying dividends nor buying back stock from shareholders. This strikes us as a lack of dedication to generating shareholder returns. Given that the majority of PDD's assets are located in China's main territory, there is a considerable regulatory risk that future dividend distribution to investors may be restricted. Consequently, stock price appreciation may be the only source of profit for investors. Furthermore, to us, PDD's business model paradigm shift risk is greater than geopolitical or regulatory risk. Alibaba's rapid expenditure in its overseas operations is indicative of its fierce response to the price war. Consequently, there's no assurance that PDD will be able to easily pass Alibaba in the next quarters.ConclusionInvestors were undoubtedly alarmed by management's remarks about long-term margin shrinkage, business model changes, and the absence of share buybacks. But if we sit down with management, we should realize that PDD currently has a leading margin and momentum, and now is the moment when it could be able to overtake Alibaba. Our sensitivity test indicates that the upside reward more than offsets the downside risk. Consequently, we believe that fear has caused the stock to be oversold at this time. We maintain our strong buy rating as a consequence.","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":343159657808080,"gmtCreate":1724819430594,"gmtModify":1724819434576,"author":{"id":"3559700461523213","authorId":"3559700461523213","name":"Dont be weak","avatar":"https://static.tigerbbs.com/06b3e51be6a54224a834dd01de25f3cc","vip":1,"crmLevel":5,"crmLevelSwitch":1,"idStr":"3559700461523213","authorIdStr":"3559700461523213"},"htmlText":"Sacrificing margins to compete with Alibaba just means that you are not on the same level. Still want to checkmate. Checkmate yourself","listText":"Sacrificing margins to compete with Alibaba just means that you are not on the same level. Still want to checkmate. Checkmate yourself","text":"Sacrificing margins to compete with Alibaba just means that you are not on the same level. Still want to checkmate. Checkmate yourself","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/343159657808080","repostId":2462019382,"repostType":2,"repost":{"id":"2462019382","kind":"highlight","pubTimestamp":1724812860,"share":"https://ttm.financial/m/news/2462019382?lang=&edition=fundamental","pubTime":"2024-08-28 10:41","market":"nz","language":"en","title":"PDD Holdings' Chess Move: Sacrificing Margins To Checkmate Alibaba","url":"https://stock-news.laohu8.com/highlight/detail?id=2462019382","media":"seekingalpha","summary":"PDD's Q2 earnings report revealed a shift toward high-quality brands, leading to a 30% stock price drop due to long-term margin concerns and no share buybacks.Despite market confusion, PDD's non-GAAP ","content":"<html><head></head><body><ul style=\"\"><li><p>PDD&#39;s Q2 earnings report revealed a shift toward high-quality brands, leading to a 30% stock price drop due to long-term margin concerns and no share buybacks.</p></li><li><p>Despite market confusion, PDD&#39;s non-GAAP operating margin surpassed Alibaba&#39;s, suggesting a strategic move to challenge Alibaba&#39;s dominance soon.</p></li><li><p>Management&#39;s confidence in their strategy is evident from increased merchant participation and cash reserves, indicating readiness for competitive challenges.</p></li><li><p>Sensitivity analysis shows significant upside potential, with a 48%-129% return in the bull case, making the stock a strong buy despite current fears.</p></li></ul><p></p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/fb880a20de01c703a6291d1ef688ff42\" tg-width=\"750\" tg-height=\"500\"/></p><p>Yoshiyoshi Hirokawa/DigitalVision via Getty Images</p><p></p><h2 id=\"id_3386954823\">Introduction</h2><p>PDD Holdings&#39; (NASDAQ:PDD) negative comments about its long-term profitability forecast, the unpredictability of geopolitical conflict, and the absence of a shareholder buyout surprised the market when the company released its Q2 earnings today. As a result, after the earnings, the stock price fell by 30%.</p><p>We published an article titled &#34;PDD Holdings Challenge To Alibaba&#39;s Reign&#34; in November 2023. We think the moment is probably near after examining its finances, the dynamics of its competitors, and the management&#39;s remarks. We will explain it in the sections that follow, and look more closely at each of the aforementioned issues separately.</p><h2 id=\"id_336546728\">Change in Long-Term Profitability Outlook</h2><h3 id=\"id_2605617804\">Shift in Business Model</h3><p>As a result of its efforts to invest in the supply chain and reduce transaction fees for merchants who carry premium brands, management anticipates a long-term drop in the company&#39;s margin.</p><p>Some background information for investors:</p><ol start=\"1\" style=\"\"><li><p>large brands like Nike, Apple, and others are referred to as high-quality brand merchants;</p></li><li><p>PDD is well-known for offering affordable white-label products;</p></li><li><p>PDD&#39;s main source of income is the sale of advertising to these white-label brands.</p></li></ol><p>Therefore, PDD&#39;s decision to concentrate on high-quality brands indicates that it will lower its support for while-label brand merchants and concentrate on large brand merchants. This initiative could therefore suggest a total overhaul of the business paradigm as it creates a conflict of interest for its while-label brand merchants. As a result, there is a lot of uncertainty in the market regarding the timing and outcome of this transition.</p><h3 id=\"id_177266955\">Q2 Financial Performance</h3><p>PD reported an 86% increase in revenues and a 156% increase in operating profits in its Q2 financial report. The revenue growth rate from transaction services and online marketing services both decreased from the previous quarter. This probably reflects management&#39;s decision to forego the white-label brand in favor of investing in a high-quality brand. Therefore, the market is confused about where the company is going.</p><h3 id=\"id_1134731684\">Strategic Implications</h3><p>Investors should, nevertheless, use common sense and realize that if the business is riding high, there should be no reason to let it go.</p><p>When comparing PDD&#39;s success to that of Alibaba (BABA), the whole picture becomes more evident. Over the past few quarters, PDD has increased its margin while Alibaba has remained silent. Nonetheless, PDD&#39;s non-GAAP operating margin climbed to 36% (calculated from its earnings reports) in Q2 2024 from 32.8% in Q1, above the EBITDA margin of 31.6% (calculated from its earnings reports) for Alibaba&#39;s commerce group (Taobao, TMall, and International Digital Commerce Group only) in this quarter.</p><p>P.S. Due to its low amortization and depreciation costs, PDD&#39;s non-GAAP operating margin is comparable to Alibaba&#39;s EBITDA margin.</p><p>Because PDD currently has a larger margin than Alibaba, PDD now has a margin advantage to compete on price over Alibaba. Furthermore, PDD&#39;s advantage against Alibaba in terms of commerce revenues was further reduced. With revenues of just 68% of Alibaba&#39;s, it expanded at a rate of 86% year over year. PDD has a good performance when compared to Alibaba&#39;s commerce group growth, which is 4% year over year.</p><p>With its double investment in price, PDD has a good possibility of surpassing Alibaba in a few quarters if all goes according to plan. Thus, it makes sense to comprehend management&#39;s choice this quarter from these angles. Thus, we interpret the PDD management&#39;s statement as an aggressive attempt to go after Alibaba rather than changes in its business model.</p><h2 id=\"id_596810965\">Geopolitical Risk and Investment Strategy</h2><p>There is indeed some degree of geopolitical risk uncertainty since developing nations may impose higher taxes on cheap goods imported from China. Nonetheless, management chose to raise rather than decrease investment, citing their belief that present investment rewards outweigh overall risk factors.</p><h3 id=\"id_681780368\">Early Indicators of Success</h3><p>The management gave investors some very insightful numbers, albeit sparingly, stating that they had seen early indications of the strategies&#39; potential for success.</p><blockquote><p>The number of new merchants and new products support our platforms saw meaningful growth. In the first week of June 18, the number of merchants participating in the 10 Billion Program grew by over 90% year-on-year, and the number of agricultural merchants increased by 83% year-on-year. Our platform also attracted a great number of new merchants in categories such as electronics, home appliances and cosmetics.</p></blockquote><p>If they are successful in adding additional merchants to the platform, it appears to us that the business is expanding rather than experiencing significant challenges. And if the management is indeed confident in its actions, then holding back on buybacks now makes sense. Even though it is true that a lack of buybacks makes investing in PDD shares less appealing. While we are not happy with their investor communications, we would rather see management properly designated for long-term priorities.</p><h3 id=\"id_4203036130\">Financial Management and Cash Reserves</h3><p>We do believe that PDD used conservative financial management, based on its historical track records. PDD kept increasing its cash reserves. PDD was close to Alibaba&#39;s $61 billion in cash and cash equivalent, with $38 billion in cash and cash equivalent on hand and just $720 million in convertible debt. This indicates to us that PDD is prepared for battle.</p><h2 id=\"id_1006610899\">Valuation</h2><h3 id=\"id_2864969942\">Base Case</h3><p>We revise our DCF model in light of its most recent financial data.</p><p>PDD is currently a highly successful and competitive business. In the worst scenario, PDD has to return to concentrating on white-label merchants since it is unable to draw in enough high-caliber brands. We believe that PDD has enough time to swiftly modify its strategy if things don&#39;t go according to plan, especially considering the size of its current user base.</p><p>Despite that, we still believe the company should continue to grow and eventually challenge Alibaba long term. However, for conservative reasons, we assume that the company will only grow by 3% annually after 2024 and will eventually maintain a free cash flow margin of 32%. This indicates that if investors purchase at the current price, there is a 48% upside. (see below chart)</p><p></p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/bc367f09bc0f43756a746cddf4c7aeb3\" tg-width=\"610\" tg-height=\"108\"/></p><p>DCF valuation (LEL)</p><p></p><h3 id=\"id_668999533\">Bear Case</h3><p>To evaluate its valuation under various long-term free cash margin and terminal growth rate scenarios, we have performed a sensitivity analysis.</p><p>In the bear case, we assume that the company was subject to intense competition risk, failed to grow at a rate greater than 3% per year, and saw a decrease in its margin as a result.</p><p>It demonstrates that the stock return has a 14%-28% upside (see below chart) from the current price, even if the company faced a major obstacle and had to lower its free cash flow margin to a level of 20%-25%.</p><p></p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/c9d5ab4464139ecf8bd63f933ac1d8e3\" tg-width=\"640\" tg-height=\"128\"/></p><p>Sensitivity test (LEL)</p><p></p><h3 id=\"id_4063060221\">Bull Case</h3><p>For the bull case, we still believe the company should continue to grow and eventually challenge Alibaba long-term. Based on various terminal growth rate estimates, the stock return potential increases to 48%-129% (see below chart), as long as the company can maintain its present margin and sustain growth of more than 3% annually.</p><p></p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/3ac7972bc43143ae957f3befda542472\" tg-width=\"640\" tg-height=\"125\"/></p><p>Sensitivity test (LEL)</p><p></p><p>As a result, it seems that the upside risk is greater than the downside risk in both scenarios. In our opinion, the stock was considerably oversold following today&#39;s earnings. We are a buyer at the current price.</p><h2 id=\"id_3404590141\">Risk Factors</h2><p>PDD has a track record of neither paying dividends nor buying back stock from shareholders. This strikes us as a lack of dedication to generating shareholder returns. Given that the majority of PDD&#39;s assets are located in China&#39;s main territory, there is a considerable regulatory risk that future dividend distribution to investors may be restricted. Consequently, stock price appreciation may be the only source of profit for investors. Furthermore, to us, PDD&#39;s business model paradigm shift risk is greater than geopolitical or regulatory risk. Alibaba&#39;s rapid expenditure in its overseas operations is indicative of its fierce response to the price war. Consequently, there&#39;s no assurance that PDD will be able to easily pass Alibaba in the next quarters.</p><h2 id=\"id_2987798804\">Conclusion</h2><p>Investors were undoubtedly alarmed by management&#39;s remarks about long-term margin shrinkage, business model changes, and the absence of share buybacks. But if we sit down with management, we should realize that PDD currently has a leading margin and momentum, and now is the moment when it could be able to overtake Alibaba. Our sensitivity test indicates that the upside reward more than offsets the downside risk. Consequently, we believe that fear has caused the stock to be oversold at this time. We maintain our strong buy rating as a consequence.</p></body></html>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>PDD Holdings' Chess Move: Sacrificing Margins To Checkmate Alibaba</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nPDD Holdings' Chess Move: Sacrificing Margins To Checkmate Alibaba\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-28 10:41 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4717329-pdd-holdings-chess-move-sacrificing-margins-to-checkmate-alibaba><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>PDD's Q2 earnings report revealed a shift toward high-quality brands, leading to a 30% stock price drop due to long-term margin concerns and no share buybacks.Despite market confusion, PDD's non-GAAP ...</p>\n\n<a href=\"https://seekingalpha.com/article/4717329-pdd-holdings-chess-move-sacrificing-margins-to-checkmate-alibaba\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"BABA":"阿里巴巴","PDD":"拼多多","LU0501845795.SGD":"瑞银大中华区股票基金P Acc SGD","LU0293314216.USD":"ALLIANZ GEM EQUITY HIGH DIVIDEND \"A\" (USD) ACC","IE0032431581.USD":"PINEBRIDGE GREATER CHINA EQUITY \"A\" (USD) ACC","BK1608":"元宇宙概念","LU0143863784.USD":"CT (LUX) I GLOBAL EMERGING MARKET EQUITIES\"DU\" (USD) ACC","BK4554":"元宇宙及AR概念","IE0034224299.USD":"PINEBRIDGE ASIA EX JAPAN EQUITY \"A\" (USD) ACC","BK4553":"喜马拉雅资本持仓","LU0072913022.USD":"UBS (LUX) EQUITY FUND - 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Templeton China A Acc SGD","LU0164880469.USD":"HSBC GIF HONG KONG EQUITY \"AC\" ACC","LU0128522744.USD":"TEMPLETON EMERGING MARKETS \"A\" ACC","LU1880383366.USD":"东方汇理中国股票基金 A2 (C)","LU0106959298.USD":"UBS (LUX) EQUITY FUND - EMERGING MARKETS SUSTAINABLE LEADERS (USD) \"P\" (USD) ACC","LU0359201612.USD":"贝莱德中国基金A2","LU0359202008.SGD":"Blackrock China Fund A2 SGD-H","LU0229945570.USD":"TEMPLETON BRIC \"A\" (USD) ACC","LU0359201885.HKD":"BGF CHINA \"A2\" (HKD) ACC","LU0054237671.USD":"FIDELITY ASIAN SPECIAL SITUATIONS \"A\" INC","BK4548":"巴美列捷福持仓","LU0880133367.SGD":"UBS (LUX) EQUITY FUND CHINA OPPORTUNITY USD \"P\" (SGD) ACC"},"source_url":"https://seekingalpha.com/article/4717329-pdd-holdings-chess-move-sacrificing-margins-to-checkmate-alibaba","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"2462019382","content_text":"PDD's Q2 earnings report revealed a shift toward high-quality brands, leading to a 30% stock price drop due to long-term margin concerns and no share buybacks.Despite market confusion, PDD's non-GAAP operating margin surpassed Alibaba's, suggesting a strategic move to challenge Alibaba's dominance soon.Management's confidence in their strategy is evident from increased merchant participation and cash reserves, indicating readiness for competitive challenges.Sensitivity analysis shows significant upside potential, with a 48%-129% return in the bull case, making the stock a strong buy despite current fears.Yoshiyoshi Hirokawa/DigitalVision via Getty ImagesIntroductionPDD Holdings' (NASDAQ:PDD) negative comments about its long-term profitability forecast, the unpredictability of geopolitical conflict, and the absence of a shareholder buyout surprised the market when the company released its Q2 earnings today. As a result, after the earnings, the stock price fell by 30%.We published an article titled \"PDD Holdings Challenge To Alibaba's Reign\" in November 2023. We think the moment is probably near after examining its finances, the dynamics of its competitors, and the management's remarks. We will explain it in the sections that follow, and look more closely at each of the aforementioned issues separately.Change in Long-Term Profitability OutlookShift in Business ModelAs a result of its efforts to invest in the supply chain and reduce transaction fees for merchants who carry premium brands, management anticipates a long-term drop in the company's margin.Some background information for investors:large brands like Nike, Apple, and others are referred to as high-quality brand merchants;PDD is well-known for offering affordable white-label products;PDD's main source of income is the sale of advertising to these white-label brands.Therefore, PDD's decision to concentrate on high-quality brands indicates that it will lower its support for while-label brand merchants and concentrate on large brand merchants. This initiative could therefore suggest a total overhaul of the business paradigm as it creates a conflict of interest for its while-label brand merchants. As a result, there is a lot of uncertainty in the market regarding the timing and outcome of this transition.Q2 Financial PerformancePD reported an 86% increase in revenues and a 156% increase in operating profits in its Q2 financial report. The revenue growth rate from transaction services and online marketing services both decreased from the previous quarter. This probably reflects management's decision to forego the white-label brand in favor of investing in a high-quality brand. Therefore, the market is confused about where the company is going.Strategic ImplicationsInvestors should, nevertheless, use common sense and realize that if the business is riding high, there should be no reason to let it go.When comparing PDD's success to that of Alibaba (BABA), the whole picture becomes more evident. Over the past few quarters, PDD has increased its margin while Alibaba has remained silent. Nonetheless, PDD's non-GAAP operating margin climbed to 36% (calculated from its earnings reports) in Q2 2024 from 32.8% in Q1, above the EBITDA margin of 31.6% (calculated from its earnings reports) for Alibaba's commerce group (Taobao, TMall, and International Digital Commerce Group only) in this quarter.P.S. Due to its low amortization and depreciation costs, PDD's non-GAAP operating margin is comparable to Alibaba's EBITDA margin.Because PDD currently has a larger margin than Alibaba, PDD now has a margin advantage to compete on price over Alibaba. Furthermore, PDD's advantage against Alibaba in terms of commerce revenues was further reduced. With revenues of just 68% of Alibaba's, it expanded at a rate of 86% year over year. PDD has a good performance when compared to Alibaba's commerce group growth, which is 4% year over year.With its double investment in price, PDD has a good possibility of surpassing Alibaba in a few quarters if all goes according to plan. Thus, it makes sense to comprehend management's choice this quarter from these angles. Thus, we interpret the PDD management's statement as an aggressive attempt to go after Alibaba rather than changes in its business model.Geopolitical Risk and Investment StrategyThere is indeed some degree of geopolitical risk uncertainty since developing nations may impose higher taxes on cheap goods imported from China. Nonetheless, management chose to raise rather than decrease investment, citing their belief that present investment rewards outweigh overall risk factors.Early Indicators of SuccessThe management gave investors some very insightful numbers, albeit sparingly, stating that they had seen early indications of the strategies' potential for success.The number of new merchants and new products support our platforms saw meaningful growth. In the first week of June 18, the number of merchants participating in the 10 Billion Program grew by over 90% year-on-year, and the number of agricultural merchants increased by 83% year-on-year. Our platform also attracted a great number of new merchants in categories such as electronics, home appliances and cosmetics.If they are successful in adding additional merchants to the platform, it appears to us that the business is expanding rather than experiencing significant challenges. And if the management is indeed confident in its actions, then holding back on buybacks now makes sense. Even though it is true that a lack of buybacks makes investing in PDD shares less appealing. While we are not happy with their investor communications, we would rather see management properly designated for long-term priorities.Financial Management and Cash ReservesWe do believe that PDD used conservative financial management, based on its historical track records. PDD kept increasing its cash reserves. PDD was close to Alibaba's $61 billion in cash and cash equivalent, with $38 billion in cash and cash equivalent on hand and just $720 million in convertible debt. This indicates to us that PDD is prepared for battle.ValuationBase CaseWe revise our DCF model in light of its most recent financial data.PDD is currently a highly successful and competitive business. In the worst scenario, PDD has to return to concentrating on white-label merchants since it is unable to draw in enough high-caliber brands. We believe that PDD has enough time to swiftly modify its strategy if things don't go according to plan, especially considering the size of its current user base.Despite that, we still believe the company should continue to grow and eventually challenge Alibaba long term. However, for conservative reasons, we assume that the company will only grow by 3% annually after 2024 and will eventually maintain a free cash flow margin of 32%. This indicates that if investors purchase at the current price, there is a 48% upside. (see below chart)DCF valuation (LEL)Bear CaseTo evaluate its valuation under various long-term free cash margin and terminal growth rate scenarios, we have performed a sensitivity analysis.In the bear case, we assume that the company was subject to intense competition risk, failed to grow at a rate greater than 3% per year, and saw a decrease in its margin as a result.It demonstrates that the stock return has a 14%-28% upside (see below chart) from the current price, even if the company faced a major obstacle and had to lower its free cash flow margin to a level of 20%-25%.Sensitivity test (LEL)Bull CaseFor the bull case, we still believe the company should continue to grow and eventually challenge Alibaba long-term. Based on various terminal growth rate estimates, the stock return potential increases to 48%-129% (see below chart), as long as the company can maintain its present margin and sustain growth of more than 3% annually.Sensitivity test (LEL)As a result, it seems that the upside risk is greater than the downside risk in both scenarios. In our opinion, the stock was considerably oversold following today's earnings. We are a buyer at the current price.Risk FactorsPDD has a track record of neither paying dividends nor buying back stock from shareholders. This strikes us as a lack of dedication to generating shareholder returns. Given that the majority of PDD's assets are located in China's main territory, there is a considerable regulatory risk that future dividend distribution to investors may be restricted. Consequently, stock price appreciation may be the only source of profit for investors. Furthermore, to us, PDD's business model paradigm shift risk is greater than geopolitical or regulatory risk. Alibaba's rapid expenditure in its overseas operations is indicative of its fierce response to the price war. Consequently, there's no assurance that PDD will be able to easily pass Alibaba in the next quarters.ConclusionInvestors were undoubtedly alarmed by management's remarks about long-term margin shrinkage, business model changes, and the absence of share buybacks. But if we sit down with management, we should realize that PDD currently has a leading margin and momentum, and now is the moment when it could be able to overtake Alibaba. Our sensitivity test indicates that the upside reward more than offsets the downside risk. Consequently, we believe that fear has caused the stock to be oversold at this time. We maintain our strong buy rating as a consequence.","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":343240959623464,"gmtCreate":1724817515728,"gmtModify":1724818021318,"author":{"id":"3570511645529213","authorId":"3570511645529213","name":"lucasL","avatar":"https://community-static.tradeup.com/news/57c2a5cab1a040d49514d20d2a0458e3","vip":1,"crmLevel":8,"crmLevelSwitch":1,"idStr":"3570511645529213","authorIdStr":"3570511645529213"},"htmlText":"Too much optimism over PDD. Alibaba is way strong in it's portfolio than PDD.&nbsp;","listText":"Too much optimism over PDD. Alibaba is way strong in it's portfolio than PDD.&nbsp;","text":"Too much optimism over PDD. Alibaba is way strong in it's portfolio than PDD.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/343240959623464","repostId":2462019382,"repostType":2,"repost":{"id":"2462019382","kind":"highlight","pubTimestamp":1724812860,"share":"https://ttm.financial/m/news/2462019382?lang=&edition=fundamental","pubTime":"2024-08-28 10:41","market":"nz","language":"en","title":"PDD Holdings' Chess Move: Sacrificing Margins To Checkmate Alibaba","url":"https://stock-news.laohu8.com/highlight/detail?id=2462019382","media":"seekingalpha","summary":"PDD's Q2 earnings report revealed a shift toward high-quality brands, leading to a 30% stock price drop due to long-term margin concerns and no share buybacks.Despite market confusion, PDD's non-GAAP ","content":"<html><head></head><body><ul style=\"\"><li><p>PDD&#39;s Q2 earnings report revealed a shift toward high-quality brands, leading to a 30% stock price drop due to long-term margin concerns and no share buybacks.</p></li><li><p>Despite market confusion, PDD&#39;s non-GAAP operating margin surpassed Alibaba&#39;s, suggesting a strategic move to challenge Alibaba&#39;s dominance soon.</p></li><li><p>Management&#39;s confidence in their strategy is evident from increased merchant participation and cash reserves, indicating readiness for competitive challenges.</p></li><li><p>Sensitivity analysis shows significant upside potential, with a 48%-129% return in the bull case, making the stock a strong buy despite current fears.</p></li></ul><p></p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/fb880a20de01c703a6291d1ef688ff42\" tg-width=\"750\" tg-height=\"500\"/></p><p>Yoshiyoshi Hirokawa/DigitalVision via Getty Images</p><p></p><h2 id=\"id_3386954823\">Introduction</h2><p>PDD Holdings&#39; (NASDAQ:PDD) negative comments about its long-term profitability forecast, the unpredictability of geopolitical conflict, and the absence of a shareholder buyout surprised the market when the company released its Q2 earnings today. As a result, after the earnings, the stock price fell by 30%.</p><p>We published an article titled &#34;PDD Holdings Challenge To Alibaba&#39;s Reign&#34; in November 2023. We think the moment is probably near after examining its finances, the dynamics of its competitors, and the management&#39;s remarks. We will explain it in the sections that follow, and look more closely at each of the aforementioned issues separately.</p><h2 id=\"id_336546728\">Change in Long-Term Profitability Outlook</h2><h3 id=\"id_2605617804\">Shift in Business Model</h3><p>As a result of its efforts to invest in the supply chain and reduce transaction fees for merchants who carry premium brands, management anticipates a long-term drop in the company&#39;s margin.</p><p>Some background information for investors:</p><ol start=\"1\" style=\"\"><li><p>large brands like Nike, Apple, and others are referred to as high-quality brand merchants;</p></li><li><p>PDD is well-known for offering affordable white-label products;</p></li><li><p>PDD&#39;s main source of income is the sale of advertising to these white-label brands.</p></li></ol><p>Therefore, PDD&#39;s decision to concentrate on high-quality brands indicates that it will lower its support for while-label brand merchants and concentrate on large brand merchants. This initiative could therefore suggest a total overhaul of the business paradigm as it creates a conflict of interest for its while-label brand merchants. As a result, there is a lot of uncertainty in the market regarding the timing and outcome of this transition.</p><h3 id=\"id_177266955\">Q2 Financial Performance</h3><p>PD reported an 86% increase in revenues and a 156% increase in operating profits in its Q2 financial report. The revenue growth rate from transaction services and online marketing services both decreased from the previous quarter. This probably reflects management&#39;s decision to forego the white-label brand in favor of investing in a high-quality brand. Therefore, the market is confused about where the company is going.</p><h3 id=\"id_1134731684\">Strategic Implications</h3><p>Investors should, nevertheless, use common sense and realize that if the business is riding high, there should be no reason to let it go.</p><p>When comparing PDD&#39;s success to that of Alibaba (BABA), the whole picture becomes more evident. Over the past few quarters, PDD has increased its margin while Alibaba has remained silent. Nonetheless, PDD&#39;s non-GAAP operating margin climbed to 36% (calculated from its earnings reports) in Q2 2024 from 32.8% in Q1, above the EBITDA margin of 31.6% (calculated from its earnings reports) for Alibaba&#39;s commerce group (Taobao, TMall, and International Digital Commerce Group only) in this quarter.</p><p>P.S. Due to its low amortization and depreciation costs, PDD&#39;s non-GAAP operating margin is comparable to Alibaba&#39;s EBITDA margin.</p><p>Because PDD currently has a larger margin than Alibaba, PDD now has a margin advantage to compete on price over Alibaba. Furthermore, PDD&#39;s advantage against Alibaba in terms of commerce revenues was further reduced. With revenues of just 68% of Alibaba&#39;s, it expanded at a rate of 86% year over year. PDD has a good performance when compared to Alibaba&#39;s commerce group growth, which is 4% year over year.</p><p>With its double investment in price, PDD has a good possibility of surpassing Alibaba in a few quarters if all goes according to plan. Thus, it makes sense to comprehend management&#39;s choice this quarter from these angles. Thus, we interpret the PDD management&#39;s statement as an aggressive attempt to go after Alibaba rather than changes in its business model.</p><h2 id=\"id_596810965\">Geopolitical Risk and Investment Strategy</h2><p>There is indeed some degree of geopolitical risk uncertainty since developing nations may impose higher taxes on cheap goods imported from China. Nonetheless, management chose to raise rather than decrease investment, citing their belief that present investment rewards outweigh overall risk factors.</p><h3 id=\"id_681780368\">Early Indicators of Success</h3><p>The management gave investors some very insightful numbers, albeit sparingly, stating that they had seen early indications of the strategies&#39; potential for success.</p><blockquote><p>The number of new merchants and new products support our platforms saw meaningful growth. In the first week of June 18, the number of merchants participating in the 10 Billion Program grew by over 90% year-on-year, and the number of agricultural merchants increased by 83% year-on-year. Our platform also attracted a great number of new merchants in categories such as electronics, home appliances and cosmetics.</p></blockquote><p>If they are successful in adding additional merchants to the platform, it appears to us that the business is expanding rather than experiencing significant challenges. And if the management is indeed confident in its actions, then holding back on buybacks now makes sense. Even though it is true that a lack of buybacks makes investing in PDD shares less appealing. While we are not happy with their investor communications, we would rather see management properly designated for long-term priorities.</p><h3 id=\"id_4203036130\">Financial Management and Cash Reserves</h3><p>We do believe that PDD used conservative financial management, based on its historical track records. PDD kept increasing its cash reserves. PDD was close to Alibaba&#39;s $61 billion in cash and cash equivalent, with $38 billion in cash and cash equivalent on hand and just $720 million in convertible debt. This indicates to us that PDD is prepared for battle.</p><h2 id=\"id_1006610899\">Valuation</h2><h3 id=\"id_2864969942\">Base Case</h3><p>We revise our DCF model in light of its most recent financial data.</p><p>PDD is currently a highly successful and competitive business. In the worst scenario, PDD has to return to concentrating on white-label merchants since it is unable to draw in enough high-caliber brands. We believe that PDD has enough time to swiftly modify its strategy if things don&#39;t go according to plan, especially considering the size of its current user base.</p><p>Despite that, we still believe the company should continue to grow and eventually challenge Alibaba long term. However, for conservative reasons, we assume that the company will only grow by 3% annually after 2024 and will eventually maintain a free cash flow margin of 32%. This indicates that if investors purchase at the current price, there is a 48% upside. (see below chart)</p><p></p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/bc367f09bc0f43756a746cddf4c7aeb3\" tg-width=\"610\" tg-height=\"108\"/></p><p>DCF valuation (LEL)</p><p></p><h3 id=\"id_668999533\">Bear Case</h3><p>To evaluate its valuation under various long-term free cash margin and terminal growth rate scenarios, we have performed a sensitivity analysis.</p><p>In the bear case, we assume that the company was subject to intense competition risk, failed to grow at a rate greater than 3% per year, and saw a decrease in its margin as a result.</p><p>It demonstrates that the stock return has a 14%-28% upside (see below chart) from the current price, even if the company faced a major obstacle and had to lower its free cash flow margin to a level of 20%-25%.</p><p></p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/c9d5ab4464139ecf8bd63f933ac1d8e3\" tg-width=\"640\" tg-height=\"128\"/></p><p>Sensitivity test (LEL)</p><p></p><h3 id=\"id_4063060221\">Bull Case</h3><p>For the bull case, we still believe the company should continue to grow and eventually challenge Alibaba long-term. Based on various terminal growth rate estimates, the stock return potential increases to 48%-129% (see below chart), as long as the company can maintain its present margin and sustain growth of more than 3% annually.</p><p></p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/3ac7972bc43143ae957f3befda542472\" tg-width=\"640\" tg-height=\"125\"/></p><p>Sensitivity test (LEL)</p><p></p><p>As a result, it seems that the upside risk is greater than the downside risk in both scenarios. In our opinion, the stock was considerably oversold following today&#39;s earnings. We are a buyer at the current price.</p><h2 id=\"id_3404590141\">Risk Factors</h2><p>PDD has a track record of neither paying dividends nor buying back stock from shareholders. This strikes us as a lack of dedication to generating shareholder returns. Given that the majority of PDD&#39;s assets are located in China&#39;s main territory, there is a considerable regulatory risk that future dividend distribution to investors may be restricted. Consequently, stock price appreciation may be the only source of profit for investors. Furthermore, to us, PDD&#39;s business model paradigm shift risk is greater than geopolitical or regulatory risk. Alibaba&#39;s rapid expenditure in its overseas operations is indicative of its fierce response to the price war. Consequently, there&#39;s no assurance that PDD will be able to easily pass Alibaba in the next quarters.</p><h2 id=\"id_2987798804\">Conclusion</h2><p>Investors were undoubtedly alarmed by management&#39;s remarks about long-term margin shrinkage, business model changes, and the absence of share buybacks. But if we sit down with management, we should realize that PDD currently has a leading margin and momentum, and now is the moment when it could be able to overtake Alibaba. Our sensitivity test indicates that the upside reward more than offsets the downside risk. Consequently, we believe that fear has caused the stock to be oversold at this time. We maintain our strong buy rating as a consequence.</p></body></html>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>PDD Holdings' Chess Move: Sacrificing Margins To Checkmate Alibaba</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nPDD Holdings' Chess Move: Sacrificing Margins To Checkmate Alibaba\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-28 10:41 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4717329-pdd-holdings-chess-move-sacrificing-margins-to-checkmate-alibaba><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>PDD's Q2 earnings report revealed a shift toward high-quality brands, leading to a 30% stock price drop due to long-term margin concerns and no share buybacks.Despite market confusion, PDD's non-GAAP ...</p>\n\n<a href=\"https://seekingalpha.com/article/4717329-pdd-holdings-chess-move-sacrificing-margins-to-checkmate-alibaba\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"BABA":"阿里巴巴","PDD":"拼多多","LU0501845795.SGD":"瑞银大中华区股票基金P Acc SGD","LU0293314216.USD":"ALLIANZ GEM EQUITY HIGH DIVIDEND \"A\" (USD) ACC","IE0032431581.USD":"PINEBRIDGE GREATER CHINA EQUITY \"A\" (USD) ACC","BK1608":"元宇宙概念","LU0143863784.USD":"CT (LUX) I GLOBAL EMERGING MARKET EQUITIES\"DU\" (USD) ACC","BK4554":"元宇宙及AR概念","IE0034224299.USD":"PINEBRIDGE ASIA EX JAPAN EQUITY \"A\" (USD) ACC","BK4553":"喜马拉雅资本持仓","LU0072913022.USD":"UBS (LUX) EQUITY FUND - 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Templeton China A Acc SGD","LU0164880469.USD":"HSBC GIF HONG KONG EQUITY \"AC\" ACC","LU0128522744.USD":"TEMPLETON EMERGING MARKETS \"A\" ACC","LU1880383366.USD":"东方汇理中国股票基金 A2 (C)","LU0106959298.USD":"UBS (LUX) EQUITY FUND - EMERGING MARKETS SUSTAINABLE LEADERS (USD) \"P\" (USD) ACC","LU0359201612.USD":"贝莱德中国基金A2","LU0359202008.SGD":"Blackrock China Fund A2 SGD-H","LU0229945570.USD":"TEMPLETON BRIC \"A\" (USD) ACC","LU0359201885.HKD":"BGF CHINA \"A2\" (HKD) ACC","LU0054237671.USD":"FIDELITY ASIAN SPECIAL SITUATIONS \"A\" INC","BK4548":"巴美列捷福持仓","LU0880133367.SGD":"UBS (LUX) EQUITY FUND CHINA OPPORTUNITY USD \"P\" (SGD) ACC"},"source_url":"https://seekingalpha.com/article/4717329-pdd-holdings-chess-move-sacrificing-margins-to-checkmate-alibaba","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"2462019382","content_text":"PDD's Q2 earnings report revealed a shift toward high-quality brands, leading to a 30% stock price drop due to long-term margin concerns and no share buybacks.Despite market confusion, PDD's non-GAAP operating margin surpassed Alibaba's, suggesting a strategic move to challenge Alibaba's dominance soon.Management's confidence in their strategy is evident from increased merchant participation and cash reserves, indicating readiness for competitive challenges.Sensitivity analysis shows significant upside potential, with a 48%-129% return in the bull case, making the stock a strong buy despite current fears.Yoshiyoshi Hirokawa/DigitalVision via Getty ImagesIntroductionPDD Holdings' (NASDAQ:PDD) negative comments about its long-term profitability forecast, the unpredictability of geopolitical conflict, and the absence of a shareholder buyout surprised the market when the company released its Q2 earnings today. As a result, after the earnings, the stock price fell by 30%.We published an article titled \"PDD Holdings Challenge To Alibaba's Reign\" in November 2023. We think the moment is probably near after examining its finances, the dynamics of its competitors, and the management's remarks. We will explain it in the sections that follow, and look more closely at each of the aforementioned issues separately.Change in Long-Term Profitability OutlookShift in Business ModelAs a result of its efforts to invest in the supply chain and reduce transaction fees for merchants who carry premium brands, management anticipates a long-term drop in the company's margin.Some background information for investors:large brands like Nike, Apple, and others are referred to as high-quality brand merchants;PDD is well-known for offering affordable white-label products;PDD's main source of income is the sale of advertising to these white-label brands.Therefore, PDD's decision to concentrate on high-quality brands indicates that it will lower its support for while-label brand merchants and concentrate on large brand merchants. This initiative could therefore suggest a total overhaul of the business paradigm as it creates a conflict of interest for its while-label brand merchants. As a result, there is a lot of uncertainty in the market regarding the timing and outcome of this transition.Q2 Financial PerformancePD reported an 86% increase in revenues and a 156% increase in operating profits in its Q2 financial report. The revenue growth rate from transaction services and online marketing services both decreased from the previous quarter. This probably reflects management's decision to forego the white-label brand in favor of investing in a high-quality brand. Therefore, the market is confused about where the company is going.Strategic ImplicationsInvestors should, nevertheless, use common sense and realize that if the business is riding high, there should be no reason to let it go.When comparing PDD's success to that of Alibaba (BABA), the whole picture becomes more evident. Over the past few quarters, PDD has increased its margin while Alibaba has remained silent. Nonetheless, PDD's non-GAAP operating margin climbed to 36% (calculated from its earnings reports) in Q2 2024 from 32.8% in Q1, above the EBITDA margin of 31.6% (calculated from its earnings reports) for Alibaba's commerce group (Taobao, TMall, and International Digital Commerce Group only) in this quarter.P.S. Due to its low amortization and depreciation costs, PDD's non-GAAP operating margin is comparable to Alibaba's EBITDA margin.Because PDD currently has a larger margin than Alibaba, PDD now has a margin advantage to compete on price over Alibaba. Furthermore, PDD's advantage against Alibaba in terms of commerce revenues was further reduced. With revenues of just 68% of Alibaba's, it expanded at a rate of 86% year over year. PDD has a good performance when compared to Alibaba's commerce group growth, which is 4% year over year.With its double investment in price, PDD has a good possibility of surpassing Alibaba in a few quarters if all goes according to plan. Thus, it makes sense to comprehend management's choice this quarter from these angles. Thus, we interpret the PDD management's statement as an aggressive attempt to go after Alibaba rather than changes in its business model.Geopolitical Risk and Investment StrategyThere is indeed some degree of geopolitical risk uncertainty since developing nations may impose higher taxes on cheap goods imported from China. Nonetheless, management chose to raise rather than decrease investment, citing their belief that present investment rewards outweigh overall risk factors.Early Indicators of SuccessThe management gave investors some very insightful numbers, albeit sparingly, stating that they had seen early indications of the strategies' potential for success.The number of new merchants and new products support our platforms saw meaningful growth. In the first week of June 18, the number of merchants participating in the 10 Billion Program grew by over 90% year-on-year, and the number of agricultural merchants increased by 83% year-on-year. Our platform also attracted a great number of new merchants in categories such as electronics, home appliances and cosmetics.If they are successful in adding additional merchants to the platform, it appears to us that the business is expanding rather than experiencing significant challenges. And if the management is indeed confident in its actions, then holding back on buybacks now makes sense. Even though it is true that a lack of buybacks makes investing in PDD shares less appealing. While we are not happy with their investor communications, we would rather see management properly designated for long-term priorities.Financial Management and Cash ReservesWe do believe that PDD used conservative financial management, based on its historical track records. PDD kept increasing its cash reserves. PDD was close to Alibaba's $61 billion in cash and cash equivalent, with $38 billion in cash and cash equivalent on hand and just $720 million in convertible debt. This indicates to us that PDD is prepared for battle.ValuationBase CaseWe revise our DCF model in light of its most recent financial data.PDD is currently a highly successful and competitive business. In the worst scenario, PDD has to return to concentrating on white-label merchants since it is unable to draw in enough high-caliber brands. We believe that PDD has enough time to swiftly modify its strategy if things don't go according to plan, especially considering the size of its current user base.Despite that, we still believe the company should continue to grow and eventually challenge Alibaba long term. However, for conservative reasons, we assume that the company will only grow by 3% annually after 2024 and will eventually maintain a free cash flow margin of 32%. This indicates that if investors purchase at the current price, there is a 48% upside. (see below chart)DCF valuation (LEL)Bear CaseTo evaluate its valuation under various long-term free cash margin and terminal growth rate scenarios, we have performed a sensitivity analysis.In the bear case, we assume that the company was subject to intense competition risk, failed to grow at a rate greater than 3% per year, and saw a decrease in its margin as a result.It demonstrates that the stock return has a 14%-28% upside (see below chart) from the current price, even if the company faced a major obstacle and had to lower its free cash flow margin to a level of 20%-25%.Sensitivity test (LEL)Bull CaseFor the bull case, we still believe the company should continue to grow and eventually challenge Alibaba long-term. Based on various terminal growth rate estimates, the stock return potential increases to 48%-129% (see below chart), as long as the company can maintain its present margin and sustain growth of more than 3% annually.Sensitivity test (LEL)As a result, it seems that the upside risk is greater than the downside risk in both scenarios. In our opinion, the stock was considerably oversold following today's earnings. We are a buyer at the current price.Risk FactorsPDD has a track record of neither paying dividends nor buying back stock from shareholders. This strikes us as a lack of dedication to generating shareholder returns. Given that the majority of PDD's assets are located in China's main territory, there is a considerable regulatory risk that future dividend distribution to investors may be restricted. Consequently, stock price appreciation may be the only source of profit for investors. Furthermore, to us, PDD's business model paradigm shift risk is greater than geopolitical or regulatory risk. Alibaba's rapid expenditure in its overseas operations is indicative of its fierce response to the price war. Consequently, there's no assurance that PDD will be able to easily pass Alibaba in the next quarters.ConclusionInvestors were undoubtedly alarmed by management's remarks about long-term margin shrinkage, business model changes, and the absence of share buybacks. But if we sit down with management, we should realize that PDD currently has a leading margin and momentum, and now is the moment when it could be able to overtake Alibaba. Our sensitivity test indicates that the upside reward more than offsets the downside risk. Consequently, we believe that fear has caused the stock to be oversold at this time. We maintain our strong buy rating as a consequence.","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":5,"commentSize":3,"repostSize":2,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2462019382"}