Yes, I would definitely buy PDD stock on this huge dip. Here’s why.

It’s been a tough few days for PDD Holdings (PDD 2.88%) shareholders. Shares fell as much as 28% on Monday — its biggest one-day drop ever — after it released disappointing second-quarter results and alarming guidance. The stock has continued to fall ever since. In total, PDD stock is now more than 40% below its August peak.

Rather than dreading the prospect of further downside, risk-tolerant investors may want to use this extreme weakness as a buying opportunity. The market is overreacting to the company’s dire warning wording. Most investors also underestimate how misleading growth metrics can be for high-growth outfits like this one.

PDD Holdings scares investors

In case you’re reading this and aren’t familiar with the company, China-based PDD Holdings is the e-commerce company formerly known as Pinduoduo. However, you may be more familiar with its presence outside of China. This is the parent for online shopping platform Temu (although it still operates as Pinduoduo in China), which connects manufacturers directly with consumers, thus bypassing the need for middlemen and distributors.

The quarter in question was not a bad one. Revenue of nearly $13.4 billion rose 86% year over year, leading to a 156% improvement in operating income in the three months ended June. But analysts were looking for a slightly higher top line.

Perhaps the focus of the post-earnings selloff is the cautious outlook the company added in its Q2 report. Vice President of Finance Jun Liu said: “In the last quarter, our revenue growth rate has slowed down on a quarterly basis. Looking ahead, revenue growth will inevitably face pressure from intense competition and external challenges.” She adds that “profitability is also likely to be affected as we continue to invest decisively.”

The deciding factor is CEO Lei Chen’s comment: “We are prepared to accept short-term sacrifices and the potential drop in profitability.”

Yes. Even without any real clarity about what the warning means in practical terms, phrases like “intensified competition” and “decreasing profitability” paint an alarming picture. Understandably, investors were startled.

The problem is that the market may be reading more into the matter than it’s worth.

Better than you think

Don’t misunderstand. Liu and Chen are clearly trying to keep investor expectations in check, and may even be trying to keep those expectations down. Take the hint.

But also keep things in perspective. It’s not like PDD entered markets that weren’t already full of competition. The company managed to penetrate them anyway with its unique factory-to-consumer service. The massive spending to fuel this growth has been worth it, and it’s not exactly a new development. The company’s direct-to-consumer business, in fact, has yet to scratch the surface of its ultimate opportunity. It connects manufacturers in China with North American consumers. And Temu outperforms its rivals in the segment of this market where it expects the greatest growth. Any other spending is in the cards, it will probably be worth it in the long run.

Meanwhile, the company’s warning that “revenue growth will inevitably face pressure from heightened competition and external challenges” does even more damage than it should, leading investors to believe that a weakening economy is limiting consumers’ ability to spend. It is not.

There are red flags to be sure. US household debt continues to rise, according to data from the Federal Reserve, with credit card and auto loans still high in Q2. China’s housing market is still on the defensive. These are anything but signs of economic strength.

Look at all the data though. U.S. retail sales improved 2.4 percent year-on-year in June, extending a long upward trend. China’s retail spending rose 2.7 percent in the same month, marking the 19th straight month the nation’s consumers spent more than they did in the same month a year earlier.

US retail sales data by YCharts.

The economic future does not look exactly bleak either. As interest rate cuts loom on the back of a definitive decline in inflation, the International Monetary Fund (IMF) is calling for global GDP growth of 3.2% over the year this year to accelerate to a pace of 3.3% next year. The IMF specifically highlights emerging markets in Asia as the leaders and drivers of this growth, with China’s GDP growth in 2024 likely to continue at 5.4% this year, followed by a still impressive 5.1% pace next year.

This is an obvious slowdown in growth, but like PDD revenues, this slowdown is largely the result of ever-increasing comparison numbers. A slowdown in the pace of comparative growth does not inherently mean that absolute growth is slowing.

Not for everyone, but now is the time if it is for you

PDD Holdings is still not the right choice for everyone. Only risk-tolerant investors should consider taking a stake, and even then, any trade with Temu’s parent company should be well-monitored and relatively small.

However, the market is overreacting to PDD’s recent revenue shortfall and is warning of impending pressures on its profitability. We also have to wonder if this stock headed into Monday’s earnings report already unfairly vulnerable to the slightest whiff of trouble.

Whatever the case, the sellers exceeded their target. Even though there is still downside from the stock’s current bearish momentum, it wouldn’t be crazy for risk-tolerant growth investors to start tiptoeing into a position here.