Why PDD Holdings fell 25.4% in August

Shares of the Chinese e-commerce disruptor PDD Holdings (PDD 0.67%)formerly known as Pinduoduo and Temu’s parent company, fell 25.4 percent in August, according to data from S&P Global Market Intelligence.

PDD Holdings reported second-quarter earnings in late August. And while current results showed torrid growth and increased profitability, management warned of both a slowdown and declining margins ahead.

“We see many challenges ahead”

In the quarter, PDD Holdings grew revenue 86% to $13.4 billion, with adjusted (non-GAAP) earnings per US depositary share of $3.20, up 122%. While the underlying figure beat analysts’ estimates, even that 86% top-line growth fell short.

But while second-quarter earnings were “mixed,” management’s comments on the outlook likely spooked investors. Co-CEO Lei Chen said in the statement that the company sees “many challenges ahead,” including increased competition in China and other geographies, along with “external challenges.” That’s likely code for macroeconomic weakness in China and potentially other geographies as consumers pull back spending on goods.

Furthermore, Chen also mentioned that Temu will begin a “new phase of investment” aimed at improving the quality of merchants on its platform while removing low-quality merchants and fraud. Notably, the US Consumer Product Safety Commission (CPSC) just launched a product safety investigation into PDD-owned Temu and another Chinese competitor Shein this month. Perhaps management sensed this coming and spent the money to better control its third-party vendors.

In any case, the prospect of cutting back to avoid competition combined with higher spending sent the stock down, which is somewhat understandable.

An incredibly cheap stock, typical of China

After the August recession, PDD Holdings is trading at a P/E ratio of just under 10. That’s a ridiculously cheap multiple for a stock that just grew revenue by 86%. Additionally, PDD Holdings has plenty of cash on its balance sheet of about $47 billion with little debt. This represents a staggering over a third of its market capitalization.

Now, it is very likely that PDD margins will drop quite a bit from their current level of 33.5%. Moreover, revenue should continue to decline from last quarter’s 86% pace.

However, this is just about the cheapest stock you can find relative to its growth, even with conservative forecasts and even in a Chinese stock market full of extremely low multiple stocks.

While the economic and geopolitical risks of investing in China are obvious, for those willing to take the plunge, PDD Holdings should be at the top of your list.