To The Moon

Stocks experienced their second straight down week, albeit losses were marginal relative to this year’s gains. With that said, as tech and crypto rest, commodities continue to capture traders’ attention.

The best-performing concepts are Tencent concept, air lease, and search engine.

Considering the different perceptions of the stock, this time TigerPicks chose $PDD Holdings Inc(PDD)$ to have a fundamental highlight to help users understand it better. PDD’s earnings are on Wednesday before the market.

$PDD Holdings Inc(PDD)$

In years' past, the company has often played second fiddle to ecommerce giants such as Alibaba and JD, given its smaller and more niche ecommerce presence and apps.

Revenues have exploded as the company's unique focus on social shopping and value-for-money products has paid off, and the stock has responded in kind, gaining nearly 500% since going public.

The company's growth has also been highly profitable, and last quarter PDD reported operating margins north of 24%.

Despite this growth, and the continued opportunity set available to management, the stock trades at an extreme discount to what we think appears to be a reasonable range for PDD's Fair Value.

Thus, with a significant valuation gap and a strong level of recent price momentum, it seems likely that shares will close the gap and continue higher.

Financials

Top down, PDD holdings owns two separate platforms, Pinduoduo and Temu.

Pinduoduo is an ecommerce platform, mainly focused on the Chinese market. The platform is well established at this point, and boasts a number of interesting quirks that competitors have been quick to attempt to emulate. The key innovation here has been the 'Bazaar' shopping format, which prioritizes conspicuous consumption and a discovery feed as opposed to a search/index model that you might find on a platform like Amazon.

Additionally, the app features very strong social commerce functionality, and the company's WeChat integration makes shopping with friends and securing discounts a breeze. With a strong focus on providing good value to users, the overall formula has boosted Pinduoduo into a strong position within the Chinese ecommerce scene, only second to Alibaba in terms of monthly active users:

PDD

QuestMobile

Temu, on the other hand, is PDD's attempt to translate this success abroad. The app is focused even more on deeply discounted merchandise, forgoing brand names and offering absolutely insane deals for a number of products.

There are some drawbacks to this approach, including long wait times for shipping and varying quality of delivered goods, but the success so far in expanding globally has been undeniable.

Right now, the Temu app is the number one free iPhone app on Apple's U.S. app store, which shows the existing hunger, even among wealthy populations, for Temu's strong value proposition:

PDD

Apple

While some have argued that overall business trends for Temu have been declining for the company since mid-last year, Temu seems to have cemented itself as a market player globally for extremely high value-for-money goods.

As PDD's portfolio of companies has grown, top and bottom-line results have been extremely impressive. Revenue has grown by leaps and bounds on a YoY basis for the last number of quarters, with Q3 2023 top line growth coming in at 88%:

PDD

Seeking Alpha

Gross profits have been growing more slowly, but remain stable on a percentage basis in the 60-70% range.

From an operating perspective, PDD has also performed well, turning the corner on profitability in 2021 and growing operating margins to ~25% over the last few years:

PDD

Seeking Alpha

These operating margins are achievable for an ecommerce platform due to the 'platform' nature of the company's marketplaces. Never taking inventory risk allows PDD to take a cut from the merchants on their platform which ultimately do have significantly thinner margins.

Finally, from a balance sheet standpoint, the company has run incredibly clean, with almost no long-term debt and a very high current ratio, which means that there's a lot of firepower available to management to deploy into further customer acquisition and strategic initiatives around life sciences and agriculture.

Some of these initiatives promise to diversify the company further as R&D in the company's Agtech offerings continue to improve & optimize the value chain in the food space, which should complement the existing ecommerce offering:

We continue to invest to support quality and agriculture products and in this process we helped farmers participate in the national market and grow their income. Our farmer merchant are encouraged by the results we receive on our platform and are every more committed to a career in agriculture.

...

Under our Agricultural Cloud Initiative, we brought digital solutions to local producers to improve the resilience and the competitiveness of the local supply chain. In recent years, with the help of Pinduoduo, we are happy to see that a new generation of growers and farmers is emerging in these regions. They are playing a vital role in driving rural revitalization.

Thus, if viewed in aggregate, PDD appears to be in an incredibly strong position. Top-line revenue and bottom-line profits are growing quickly, and we expect will to continue doing so, and the company's two strong apps should buttress one another as investment in R&D and Capex promises to expand the market for both, both domestically and internationally.

Valuation

But what is this company worth?

Right now, PDD trades at a modest 5x sales and 22x Adjusted Operating Earnings.

For a company growing it's top and bottom lines at 50%+ YoY, this appears to be an incredible deal.

Additionally, when compared to how the company has been valued historically, PDD appears to be undervalued:

PDD

Earnings (FAST Graphs)

PDD

Sales (FAST Graphs)

The earnings multiple above is based on the company's expected future EPS growth rate of 30%, which would imply a 30x multiple. This is also in line with the company's average multiple over time, which means that PDD is historically undervalued on an earnings basis.

Additionally, the sales valuation above is based on the company's historical valuation of ~8x sales, which is a premium to where things trade currently.

All in all, if you take PDD's expected top and bottom-line growth rates and extrapolate out both model and historical multiples, you'll end up with a Fair Value range that sits at more than a 20% premium to today's price, 1 year out:

PDD

It's still one of the most attractive companies in the consumer discretionary (XLY) market at the moment:

PDD

PropNotes.co

Taken together, PDD appears to be incredibly attractively valued, especially given the company's strong market position, large war chest, and potential future growth.

Risks

While we like both the timing and the value of an entry into PDD's stock for the time being, there are a number of risks associated with doing so that should be considered before making a final decision.

The key risk here is the fact that PDD is not an American company, and as we all know, that means that there is a higher level of risk associated with a number of things that investors in U.S. stocks take for granted.

All of these risks, if they flare up, could present serious downside to the current stock, despite what we believe the fair value of the company to be.

To be clear, we're not alleging anything about PDD specifically in this risk profile, but when it comes to investing, multiple perception is reality to some degree, and any issues around these risk vectors could absolutely torpedo an equity investment, as many investors into high growth Chinese firms in the past have been burned and likely won't wait to sell out of a position at the first sign of trouble.

Additionally, there's a risk that PDD's top and bottom line growth could slow, which may hurt the multiple.

That said, we still think the upside overshadows the downside here, and the entry multiple, at only 22x AOP, appears to be a large margin of error that should buttress us against future multiple risks.

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts.

Based on 9 Wall Street analysts offering 12 month price targets for PDD Holdings in the last 3 months. The average price target is $181.44 with a high forecast of $226.00 and a low forecast of $136.00. The average price target represents a 46.63% change from the last price of $123.74.

Resource:

https://seekingalpha.com/article/4671171-pdd-the-next-chinese-winner-you-should-know-about

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