PDD Holdings (PDD) stock price has suffered a harsh reversal in the past few weeks as concerns about the company’s growth continued. It has dropped by over 31% and is trading at its lowest point since September 2023. It has fallen 42% from its all-time high, giving it a market cap of over $133 billion.
PDD’s slowing growth
PDD Holdings is a leading Chinese company that runs platforms like Pinduoduo and Temu, some of the most popular players in the e-commerce industry.
Pinduoduo is a well-known brand that focuses on social e-commerce solutions in the country while Temu is one of the fastest-growing platforms globally.
The most recent results showed that the company’s growth was slowing. Total revenue rose by 86% in the second quarter to over $13.3 billion while its operating profit soared by 156% to over $4.48 billion.
Most of this growth was because of its Temu brand, which has become a popular name because of its cheap products and heavy marketing.
The stock crashed after the management warned of “many challenges” ahead and that he was prepared to accept short-term sacrifices and a potential decline in profitability.
PDD Holdings’ performance was in line with other Chinese e-commerce companies that have published their results recently. In its most recent results, JD.com said that its revenue in the second quarter rose to RMB 291.3 billion from RMB 287 billion in the same period in 2023.
Its income from operations rose from RMB 8.6 billion to over RMB 11.60 billion. With its growth slowing, the company launched a big $5 billion share buyback to boost its stock performance.
Similarly, Alibaba released strong but weak numbers as its revenue rose by just 4% in the second quarter to $33.47 billion. Its income from operations fell by 15% to over $4.9 billion.
Temu is a big concern
As I have written before, Temu is PDD Holdings biggest concern. For starters, Temu is a company that offers an e-commerce platform that lets users buy products directly from manufacturers in China, with most products going for less than $5.
Temu is a big risk because of past performance of key companies. The best example of this is Wish.com, a company that dominated the discount e-commerce industry for a long time.
Wish, which was owned by ContextLogic, became a highly popular company a few years ago, only for its business to implode because of low profit margins and high losses.
Therefore, there are concerns whether PDD Holdings can succeed where Wish.com failed a few years ago.
I believe that Temu will likely end up like Wish, costing too much money in marketing and generating small profits for the parent company.
The other Temu-related concern is that the company has not provided metrics about its business. We still don’t know the platform’s margins, the number of its active users, and how it works specifically.
What is clear, however, is that PDD Holdings is spending substantial sums of money in marketing. Its annual sales, general, and admin expenses rose from over $4.1 bilion in 2019 to over $12.3 billion in the last financial year.
The most recent results showed that the sales and marketing expenses jumped from RMB 17 billion in the three months to June to over RMB 26 billion.
PDD Holdings is a cheap company
Despite the Temu woes, the reality is that PDD Holdings is one of the cheapest companies in the market today.
The most recent financial results showed that the company had about $50 billion in current assets. These assets include $31.3 billion in short-term investments, $7.8 billion in cash and equivalents, and over $8 billion in restricted cash. Its total current liabilities stands at just $23.5 billion.
PDD Holdings has little debt and is relatively undervalued as it has a P/E ratio of 8.6, lower than the industry average of 17.25. The S&P 500 index has a P/E multiple of 21.
However, at times, it is not usually recommended to invest in companies because they are cheap. In fact, investors who bought the cheap Alibaba stock have sufferred substantial losses in the past few years.
PDD Holdings stock price analysis
The weekly chart shows that the PDD Holdings share price has dropped sharply in the past few days. This retreat started when the stock peaked at $164.62, its highest point on May 20th.
The stock has retreated below the 50-week and 200-week Exponential Moving Averages (EMA) and the ascending trendline shown in green. Therefore, the stock will likely continue falling as sellers target the next key support level at $59.76, its lowest point on May 15.
The alternative scenario is where it remains in a tight range in the coming months as investors attempts to fill the gap created last week.
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