On an emotional level, buying when there's blood in the streets is easier said than done. Temu and Pinduoduo parent company PDD Holdings(NASDAQ: PDD) provided a textbook example recently with a share price bloodletting to test the mettle of self-proclaimed contrarians.
As is typical with a blood-in-the-streets event, social media pundits and Wall Street's experts aired their grievances and vented their consternation. Amid the fear and loathing, predicting a bottoming process for the Chinese e-commerce stock won't be easy -- but then, capitalizing on great opportunities never is.
Let's assess what could be in store for PDD Holdings from here.
86% sales growth isn't good enough?
In 2024's second quarter, PDD Holdings grew its revenue 86% year over year to the equivalent of $13.36 billion. Yet, investors panic-dumped their shares, sending PDD stock from nearly $150 to $100 in a single day.
Evidently, short-term stock traders also overlooked the 156% jump in its GAAP-based operating profit and 144% growth in net income. It just goes to show that investors can correctly predict strong sales and earnings growth but still lose their shirts if the market chooses to focus on other factors.
What prompted the sell-off, then? For one thing, even 86% sales growth wasn't good enough for Wall Street as analysts had expected PDD Holdings to generate $14.03 billion in second-quarter revenue. Perhaps that says more about Wall Street's sky-high expectations than it does about PDD Holdings' actual performance.
In any case, the revenue miss wasn't the only sell signal for skittish investors. Commentary from PDD Holdings' executives further fanned the flames, with Co-CEO Lei Chen declaring that the company is "prepared to accept short-term sacrifices and potential decline in profitability." Vice President of Finance Jun Liu reiterated this theme, cautioning, "Profitability will also likely to be impacted as we continue to invest resolutely."
More specifically, Chen clarified that PDD will invest in the "platform's trust and safety, support high-quality merchants, and relentlessly improve the merchant ecosystem." Clearly, short-term stock traders weren't willing to stick around to find out whether PDD's self-investments will ultimately justify the "short-term sacrifices and potential decline in profitability" that's likely coming.
The bears have a field day
In the wake of the share-price rout and ill-received executive commentary, it didn't take long for observers to convey their displeasure. China Market Research Group Managing Director Benjamin Cavender provided a typical example, warning that even if Pinduoduo "clamped down on product quality issues, they are still operating in a very challenging economic environment that is likely to be even more competitive as major players also look at mitigating the effects of low consumer confidence."
Fair enough although low consumer confidence in China and competitive pressure from Alibaba and JD.com didn't suddenly arise when PDD Holdings released its second-quarter report. These challenges should already have been known, understood, and priced in prior to the cautionary commentary of PDD's management.
Meanwhile, Citigroup's Alicia Yap cited "management's intentional/proactive cautious outlook comment" as a reason she expects the stock to "likely be range bound until PDD is able to regain investor confidence through few quarters of consistent result beat." Is it conceivable, though, that insisting on "result beats" may be unreasonable after PDD Holdings posted 86% sales growth, 156% operating profit growth, and 144% net income growth?
Yap and other big-bank analysts chopped their PDD stock price targets like lumberjacks, but they really had no choice as they had to adjust their predictions to a drastically reduced share price. Suffice it to say, few true contrarians could be found on Wall Street while the sell-off was under way.
Wresting opportunity from volatility
So, the bears had their field day. But then, that's how prime buying opportunities arise in an ultra-efficient market: Management braces investors for impact, nervous investors get shaken out of the tree, and commentators comment. Then, analysts slash their price targets out of necessity and more selling ensues.
Not in spite of this, but because of it, I'm predicting that PDD Holdings stock will at least rebound to $120 this year. This wouldn't require a full share price recovery -- not even close. Rather, it would only require a contraction of fear and share price volatility, which isn't uncommon after fear and volatility spike 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 also not fatal, PDD's loyal shareholders could get a surprisingly soft landing before the year is over.
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David Moadel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JD.com. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
