Prediction: This will be PDD Holdings’ next big move

On an emotional level, buying when there is blood in the streets is easier said than done. Parent company Temu and Pinduoduo PDD Holdings (PDD 2.88%) recently provided a textbook example of a stock price bleed to test the mettle of self-proclaimed naysayers.

As is typical of a blood-in-the-streets event, social media pundits and Wall Street pundits voiced their displeasure and expressed dismay. Amidst the fear and loathing, predicting a bottoming process for Chinese e-commerce stock won’t be easy — but then, capitalizing on big opportunities never is.

Let’s assess what could be in store for PDD Holdings from here.

86% increase in sales not good enough?

In the second quarter of 2024, PDD Holdings grew its revenue by 86% year-over-year to the equivalent of $13.36 billion. However, investors panicked the stock, sending PDD shares from nearly $150 to $100 in a single day.

Obviously, short-term stock traders also overlooked the 156% increase in GAAP operating profit and the 144% increase in net income. It just goes to show that investors can correctly predict sales and strong earnings growth, but still lose their shirts if the market chooses to focus on other factors.

What prompted the sale, then? First, even an 86% sales increase wasn’t good enough for Wall Street, as analysts expected PDD Holdings to generate $14.03 billion in revenue in the second quarter. Perhaps that says more about Wall Street’s soaring expectations than PDD Holdings’ actual performance.

However, the earnings miss wasn’t the only sell signal for upset investors. Comments from PDD Holdings executives further fanned the flames, with co-CEO Lei Chen saying the company was “prepared to accept short-term sacrifices and a potential drop in profitability.” Vice President of Finance Jun Liu reiterated this theme, warning: “Profitability will also likely be affected as we continue to invest decisively.”

More specifically, Chen clarified that PDD will invest in “trust and safety of the platform, support high-quality merchants, and continuously improve the merchant ecosystem.” Clearly, short-term equity traders weren’t willing to stick around to find out whether PDD’s self-investment would ultimately justify the “short-term sacrifices and potential drop in profitability” that was likely to occur.

The Bears are having a field day

In the wake of the stock price rout and ill-received executive comments, it didn’t take long for observers to air their displeasure. China Market Research Group managing director Benjamin Cavender provided a typical example, warning that even though Pinduoduo has “restricted itself on product quality issues, they are still operating in a very challenging economic environment that it is likely to be even more competitive as major players also look to mitigate the effects of low consumer confidence”.

Fair enough, although low consumer confidence in China and competitive pressure from Alibaba and JD.com it didn’t come out of the blue when PDD Holdings released its second quarter report. These challenges should have already been known, understood and assessed prior to PDD management’s cautionary comment.

Meanwhile, City GroupAlicia Yap cited “cautious/intentional/proactive management commentary” as the reason why she expects the stock to “likely be limited until PDD manages to regain investor confidence with a few quarters of solid results.” Is it conceivable, however, that the insistence on “beating results” may be unreasonable after PDD Holdings posted an 86% increase in sales, a 156% increase in operating profit and a 144% increase in net income?

Yap and other big bank analysts cut their price target on PDD shares like lumberjacks, but they really had no choice as they had to adjust their predictions to a sharply reduced share price. Suffice it to say, few real opponents could be found on Wall Street while the selloff was underway.

Wringing opportunity from volatility

So the bears had their field day. But then, that’s how top buying opportunities in an ultra-efficient market come about: Management prepares investors for impact, jittery investors are shaken out of their trees, and commentators comment. Then analysts lower their price targets out of necessity and more selling occurs.

Not despite this fact, but because of I predict that PDD Holdings stock will return to at least $120 this year. This would not require a full share price recovery — not even close. Rather, it would only require a contraction in fear and stock price volatility, which is not uncommon after fear and volatility have risen to an extreme level. After all, PDD Holdings’ management prepared investors for turbulence, and the market immediately priced that turbulence into PDD stock.

Just maybe, after a flight that’s not smooth but not fatal, loyal PDD shareholders could get a surprisingly soft landing before the year is out.