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As one of the up-and-coming ecommerce plays in China, Pinduoduo (PDD) has become a stock that many growth investors seeking reasonable valuations have looked to recently.
Indeed, there are many reasons why investors are avoiding Chinese tech altogether. A range of CCP crackdowns on tech have rained down on this sector in recent months. Starting with an anti-monopoly investigation and $2.8 million fine of Alibaba (BABA), the government has also halted the IPO of Alibaba subsidiary Ant Group, conducted a cybersecurity crackdown on Didi (DIDI) following its U.S. IPO listing, essentially forced a $100 billion tutoring industry in China to go non-profit, and has considered other reforms to foreign listings and the VIE structure attached to American Depository Receipts (which is how most foreign investors buy stakes in Chinese companies).
That’s a long list of government-imposed headwinds on a given sector. For now, Pinduoduo has managed to stay out of the fray in terms of company-specific news on the matter. However, it appears President Xi is not afraid to regulate away the ability of the country’s flagship companies to post profits. This has hurt the entire tech sector, with the Golden Dragon Index currently down more than 40% from its highs earlier this year.
That being said, the case can be made that all this regulatory oversight is likely to prove to be short-term in nature. Should that be the case, and should the Chinese government resume its laissez-faire governance model at some point, PDD stock certainly looks enticing at these levels. After all, PDD stock is now down nearly 60% from its peak. At some point, these shares will become too cheap to ignore for investors.
Here are two of the reasons why PDD stock could see some value buying at these levels. (See Pinduoduo stock charts on TipRanks)
Business Model Enticing
One of the things many investors latch onto when it comes to Pinduoduo is the company’s focus on providing healthy food in a timely manner for its population. Operating as the “farm to table” ecommerce company in China, Pinduoduo has managed to build one of the most comprehensive agricultural to consumer businesses in the world.
Pinduoduo’s growth has been incredible, as Chinese consumers seek fresh produce from trusted sources. We’ll get to the growth numbers in a second, however looking at it from a business model standpoint, the growth Pinduoduo has seen in this niche market is understandable. Consumers want convenience and farmers want price stability. Pinduoduo is the e-commerce “middle man” providing both.
In recent years, Pinduoduo has grown its ecommerce market share largely by selling its goods at a loss. Accordingly, PDD stock is one long-term growth investors buy, in the hopes that this market share growth will turn profitable, once Pinduoduo scales to a certain point. However, concerns around profitability have led some investors to suggest that the company’s existing valuation multiples are too high. Given the recent regulatory oversight, Pinduoduo's drop is thus understandable. Its drop is among the largest of the tech sector's declines, even given the company-specific regulatory penalties that other companies received.
That being said, there is a reason why this stock is so expensive in the first place.
Financials Paint an Intriguing Picture for PDD Stock
From a growth perspective, there’s a lot to like about Pinduoduo. The company has grown its revenues at a triple-digit rate in recent years, and has started gaining market share on incumbents Alibaba and JD.com (JD). On a forward-looking basis, analysts estimate Pinduoduo to report revenue growth in the 78% range. That’s absolutely incredible, and blows most large cap tech companies out of the water.
As mentioned, Pinduoduo has been able to grow this quickly by offering its products to its consumers at an unprofitable rate. The company has stated it cut its rates to aid farmers through the pandemic, an honorable move. Given President Xi’s ties to the countryside and farmers, this could be a key reason why Pinduoduo hasn’t seen any sort of penalties thus far. The company’s platform provides a social good that the Communist party is likely to view favorably. That could be extremely helpful to the company, in this rather dark era for Chinese stocks.
What Analysts are Saying about PDD Stock
According to TipRanks’ analyst rating consensus, PDD stock comes in as a Moderate Buy. Out of 10 analyst ratings, there are 7 Buy recommendations, 2 Hold recommendations, and 1 Sell recommendation.
As for price targets, the average Pinduoduo price target is $155.30. Analyst price targets range from a low of $85.00 per share to a high of $221.00 per share.
Pinduoduo’s business model is one that has provided incredible growth for patient long-term investors. Yes, the company isn’t yet profitable. However, given the nature of what Pinduoduo does, and how critical this company could be to maintaining the country’s food supply moving forward, this is a company that is worth looking at, relative to the amount of regulatory risk that’s priced in today.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.