4 Reasons to Buy PDD Stock Like There’s No Tomorrow

PDD Holdings (PDD -4.09%)one of China’s top e-commerce companies, was one of the few Chinese stocks to buck the sector’s ongoing selloff. Its share price has risen 80% over the past 12 months, while the stock Alibaba (GRANDMA -0.38%) and JD.com (JD 2.25%) decreased by 5% and 21% respectively.

Given the strong performance, some investors may wonder if there’s any upside left to take advantage of. Let’s review four reasons why PDD is still worth buying today.

1. PDD is the fastest growing e-commerce leader in China

PDD was founded just nine years ago (under the name Pinduoduo) but quickly carved out a niche for itself with its discount marketplace, which targeted shoppers in China’s lower cities. It encouraged its shoppers to team up on social media channels to get massive discounts.

Image source: Getty Images.

PDD then leveraged its initial growth momentum to launch an online agricultural platform that connected farmers directly to consumers. This farm-to-table channel has allowed it to sell fresh produce at much lower prices than traditional supermarkets. It also gave PDD a foothold in the agricultural market that Alibaba and JD sorely lacked.

From 2018 to 2023, PDD grew its annual revenue at an astounding compound annual growth rate (CAGR) of 80%. In comparison, Alibaba’s revenue only grew at a 20% CAGR from fiscal 2019 to fiscal 2024 (which ended in March), while JD’s revenue grew at an even slower 19% CAGR from 2018 until 2023.

From 2023 to 2026, analysts expect PDD revenue to grow at a CAGR of 38%. That growth should be driven by its market share gains in China and Temu, the cross-border marketplace that connects Chinese sellers with overseas buyers.

Analysts expect Alibaba’s revenue to grow at a CAGR of 8% from fiscal 2024 to fiscal 2027 as it seeks to offset slowing growth in its China e-commerce markets by expanding its overseas and cross-border markets. They expect JD’s revenue to grow at only a 5% CAGR from 2018 to 2023. We should take these estimates with a grain of salt, but they strongly suggest that PDD will remain the fastest-growing e-commerce leader from China.

2. PDD profits are rising

PDD became profitable in 2021 and its net income four times in 2022 and almost doubled in 2023. Its profits skyrocketed as it phased out its lower-margin primary market, expanded its higher-margin third-party market, and diluted its logistics expenses. Analysts expect net income to grow at a CAGR of 47% from 2023 to 2026.

Alibaba’s e-commerce business operates on a similar third-party model, but its overseas markets operate at much lower margins than its Chinese markets. Alibaba’s higher e-commerce margins are also offset by lower margins in its other businesses. JD still generates most of its revenue from its lower-margin home market.

3. PDD is not targeted by antitrust regulators

In 2021, China’s antitrust regulators hit Alibaba with a record $2.75 billion fine and forced it to end its exclusive deals with merchants and curb loss-making promotions. He was also prohibited from making large investments and purchases without government approval. These new restrictions have eroded the market leader’s defenses against PDD and JD.

PDD is still China’s third-largest e-commerce company by annual revenue, so it hasn’t been targeted by a major antitrust crackdown like Alibaba. Its agriculture business was hit with a minor fine for undercutting neighborhood markets in 2021, but it does not face as many regulatory challenges as Alibaba or JD.

4. PDD’s stock looks very cheap

Shares of PDD trade at just 13 times this year’s earnings, which is a very cheap multiple for a company that could nearly triple its annual profit over the next three years. Alibaba and JD trade at 14 and 9 times this year’s earnings, respectively.

Macroeconomic challenges in China and the country’s technology and trade conflicts with the U.S. continue to compress valuations for all three of these stocks and many similar companies in the industry. But if those tensions ease, many value-seeking investors will turn to Chinese stocks — and PDD will look like a much better buy than Alibaba or JD when that happens.