To The Moon

$PDD Holdings Inc(PDD)$ 's stock price plummeted after its earnings report on Monday.

Based on past experience, it seems that if a good company experiences a sharp correction, it is worth trying to buy the bottom.

PDD has been considered a stronger company than many Chinese concept stocks this year. Was $PDD Holdings Inc(PDD)$ overvalued before and this is a healthy correction?

In its latest report, Goldman Sachs gave $PDD Holdings Inc(PDD)$ a buy rating, with a 12-month basic target price of $184:

• Pinduoduo's stock price has performed poorly this year, and its current price-to-earnings ratio is less than 10 times, which has reflected investors' concerns about intensified domestic competition and Temu's geopolitical concerns.

• At the same time, Pinduoduo's faster GMV growth and transaction service revenue exceeded expectations, which means that Temu's growth momentum continues. Pinduoduo is still one of the fastest-growing companies in China's Internet second-quarter performance so far, and its strategy/investment will drive future growth.

• We hold a buy rating on Pinduoduo, based on its advertising technology capabilities (ROI-based marketing tools) and China's cost-competitive suppliers/merchants/supply chains, plus favorable risk-return, with a 12-month basic target price of $184, which has 84% ​​upside from the current market value. The current market value does not include the valuation of Temu.

Regarding the overnight plunge, Goldman Sachs believes that this violent negative reaction may be due to three aspects:

• 1. Investors had high expectations before the earnings report was released. Due to the strong market expectations, Pinduoduo's stock price has risen by about 20% since the end of July, while the KWEB (KraneShares China Overseas Internet ETF) index has fallen by 4% during the same period;

• 2. The growth of online marketing services showed the first signs of normalization, with year-on-year growth slowing to 29%, which was lower than market expectations. But we believe that Pinduoduo's performance is still significantly better than Alibaba's 1% increase in customer management revenue and the median growth of Kuaishou's e-commerce advertising.

• 3. The comments of management scared the market. Pinduoduo's management pointed out in the conference call that due to increased competition/and the possible decline in long-term profitability to promote high-quality development, it is expected that future revenue growth will slow down and sacrifice short-term profits; Pinduoduo plans to spend 10 billion yuan in the next 12 months to support high-quality merchants; because the overall investment stage is still in progress, Pinduoduo will not repurchase or distribute dividends in the next few years.

In addition, Goldman Sachs pointed out that Pinduoduo's performance highlights also include Temu's strong GMV reaching US$11 billion, and transaction commission income increased by 234% year-on-year. Due to the reduction of subsidy levels in mature markets (such as the United States) and strict control of procurement prices, profit margins have improved quarter by quarter. Adjusted EBIT (earnings before interest and taxes) also exceeded expectations, which may be attributed to the improvement of domestic profitability and Temu unit profitability.

Source: Goldman Sachs

However, Goldman Sachs also issued a downward warning on stock prices:

(1) Online marketing revenue may be lower than expected due to lower e-commerce ROI/increased sales-based advertising inventory and narrowing GMV growth gap with the industry;

(2) Geopolitical headwinds may be greater than expected when entering Europe and other developed markets with strong consumer power;

(3) Competition may be more intense than expected if Alibaba's new low-priced advertising initiative is successful and Douyin's shelf-based low-priced goods expand faster than expected;

(4) Reinvestment to maintain growth may pose a downside risk to core profit margins;

(5) Lack of segment disclosure of business performance and profitability may lead to difficulties in analyzing/estimating domestic and international (Temu) performance and profitability.