PDD's (NASDAQ: PDD) stock closed at a record high of $202.82 on Feb. 17, 2021. That represented a 10-bagger gain from its IPO price of $19 on July 26, 2018. The bulls were impressed by the Chinese e-commerce leader's explosive growth rates, and the temporary buying frenzy in hyper-growth stocks amplified its gains.
But today, PDD trades at about $95. It shed over half of its value as its growth cooled and rising rates compressed its valuations. Escalating tensions between the U.S. and China also drove many U.S. investors away from Chinese stocks. However, I believe PDD still has a shot at delivering another 10-bagger gain over the next decade.
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How PDD differs from Alibaba and JD
PDD was founded only nine years ago, but it quickly expanded and became China's third-largest e-commerce company after Alibaba(NYSE: BABA) and JD.com (NASDAQ: JD). PDD's initial growth spurt was driven by China's lower-income shoppers in its lower-tier cities. It generally sold cheaper products than Alibaba and JD, and it encouraged its shoppers to team up across social media networks to score big bulk discounts.
PDD subsequently launched a farm-to-table platform that allowed China's farmers to directly sell their fresh produce to consumers at lower prices. That strategy disrupted traditional grocers and turned PDD into China's largest online agricultural platform. Alibaba and JD only operate traditional brick-and-mortar supermarkets.
In 2022, PDD expanded overseas with Temu, a cross-border marketplace that connected its Chinese merchants with overseas buyers. It's now one of the world's most popular e-commerce apps with more than 167 million monthly active users (MAUs) worldwide, and 50 million of its MAUs are in the United States. Alibaba operates a similar cross-border marketplace called AliExpress, but JD's cross-border marketplace only connects overseas sellers to Chinese buyers.
PDD initially sold its products through first-party and third-party channels like JD. But in 2021, it phased out its lower-margin first-party marketplace and expanded its higher-margin third-party marketplace instead. This makes it more similar to Alibaba, which only operates third-party marketplaces in China and other countries.
Lastly, China's antitrust regulators haven't pilloried PDD in the same way they cracked down on Alibaba. Instead, PDD likely benefited from those tighter restrictions against Alibaba -- which include a ban on its exclusive deals with merchants, more scrutiny of its algorithm-driven promotions, and tougher restrictions for its future investments.
Why did the bulls retreat from PDD?
From 2018 to 2023, PDD's revenue grew at a compound annual growth rate (CAGR) of 80%. It also turned profitable in 2021 after it shut down its first-party marketplace, and its net income rose at a CAGR of 178% from 2021 to 2023.
Those growth rates made it China's fastest-growing e-commerce leader. Alibaba's revenue only grew at a CAGR of 20% from fiscal 2019 to fiscal 2024, which ended this March. JD's revenue rose at a CAGR of 19% from 2018 to 2023.
PDD's growth rates have been explosive, but some cautious comments during its second quarter conference call on Aug. 27 sank its stock. CEO Lei Chen said PDD was "seeing many new challenges ahead, from changing consumer demand, intensifying competition, and uncertainties in global environment". To counter those challenges, Chen warned that PDD would need to "enter a new phase of high-quality development" with "increased investments" which would erode its profits.
That warning rattled the bulls, but many other expanding e-commerce leaders -- including Amazon(NASDAQ: AMZN) and MercadoLibre(NASDAQ: MELI) -- issued similar warnings before as they scaled up their businesses. Yet those companies continued to flourish once their investments blossomed and boosted their profits again.
PDD looks undervalued relative to its growth potential
For now, analysts still expect PDD's revenue to grow at a CAGR of 36% from 2023 to 2026 as its EPS rises at a CAGR of 39%. We should take those estimates with a grain of salt, but they're stellar for a stock that trades at just 7 times next year's earnings. Alibaba and JD trade at 14 and 8 times forward earnings, respectively.
Assuming PDD meets those expectations, grows its EPS at a slightly slower CAGR of 20% through 2034, and trades at a higher but still reasonable multiple of 20, its stock price would soar nearly tenfold to about $930 by the final year.
But to hit that target, PDD would need to widen its moat against Alibaba and JD in China, continue to expand Temu overseas, and fire up new growth engines. The tensions between the U.S. and China would also need to ease before most investors pay higher valuations for Chinese stocks again. In other words, PDD could remain out of favor as it weathers its near-term macro and competitive headwinds. But over the long term, I believe it's still a potential multibagger growth stock.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon and MercadoLibre. The Motley Fool has positions in and recommends Amazon, JD.com, and MercadoLibre. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
