How High Will PDD Stock Go?

Gen-Z shoppers have largely grown up using the Internet and, since then, have become accustomed to doing almost everything digitally.

The Department of Commerce’s Census Bureau recently reported that the estimated sales for retail e-commerce in the United States during the last three months of 2023 reached $285.2 billion, representing growth of 0.8% year-over-year growth.

In Q4 2023, the estimate for online shopping sales went up by 7.5% compared to the same quarter in 2022. Meanwhile, total retail sales saw a rise of just 2.8%. E-commerce sales share was 15.6% of all sales during this last quarter of the year.

The growth is not contained to the US by any means, either. Chinese e-commerce giant PDD Holdings Inc. (NASDAQ:PDD) has been on a tear, and now investors are wondering just how high it can go?

Temu Driving Massive Growth for PDD

With the Chinese economy starting to recover, PDD Holdings has become a stand-out stock attracting investors with strong results. The company is the driving force behind Pinduoduo and Temu.

Pinduoduo features affordable products and interactive activities while Temu has made a big splash since entering the United States market in 2022. 

Temu has grown very fast and reported staggering download figures that attests to its widespread appeal. It also poses a serious threat to Amazon.com, Inc. (NASDAQ:AMZN).

Analysts have noted Temu’s growth rate is highly unusual and largely attributable to its aggressive advertising strategy that now features 123 million downloads in the U.S. and 319 million globally.

PDD Growing Faster Than Ever

Over the past 3 years, PDD has grown at an astonishing rate. In 2021, the top line grew by 57.2% followed by an additional 39% in 2022 and for the full year 2023, revenues soared by 89.7% year-over-year.

During the last three months of 2023, the company’s revenues rose by 123.2% compared to last year, reaching $12.52 billion.

The company is highly profitable too. Non-GAAP operating profit rose 118.9% from the year-ago value to $3.46 billion.

During that same quarter, the business’s non-GAAP net income for ordinary shareholders went up by 110.4% to $3.59 billion and non-GAAP earnings per share rose by 108.2% to reach $0.60.

The balance sheets has hallmarks of being a fortress too with cash and cash equivalents rising to $8.42 billion, an increase of 74.2% year-over-year, while total assets reached $49.03 billion, a 36.1% growth compared to a year ago.

No Matter Where You Look, PDD Impresses

A fast-growing top and bottom line aren’t the only two things to like in addition to the rock solid balance sheet. Sales growth is forecast once again this year and the 5-year projection is for a CAGR of 25.2%.

Analysts have really taken a liking to PDD with 8 of them revising their earnings guidance higher for the upcoming quarter.

That’s not a surprise given the profitability and also the highly impressive gross margin that came in at 63% last year.

Even the P/E ratio is not especially lofty at 18.2x for a company growing so quickly but better yet is the P/E ratio relative to the growth rate, which sits at just 0.16x.

Will PDD Stock Go Up?

Analysts believe PDD stock will go up a lot and have a consensus price target of $205 per share on it, representing 47%.

In spite of the price per share rising by over 500% in the last five years it seems the runway is long still for this high-flying top Chinese e-commerce stock.

Revenue forecasts align with the optimism given revenues are forecast to rise from $34.8 billion in 2023 to $57.1 billion this year. Next year, they are projected to come in at $72 billion and by 2026 a full $86.9 billion is expected to be reported.

Profitability is expected to balloon higher too with 2023’s EBIT of $8.2 billion being left in the dust by 2024’s $18.0 billion forecast and 2025’s $24.5 billion. By 2026, earnings before interest and taxes are expected to hit an astonishing $33.0 billion.

It’s no wonder that a discounted cash flow forecast analysis pegs fair value at $189 per share, suggesting as much as 31.1% upside opportunity.

What Could Go Wrong?

While there is a lot to like about PDD, nothing is a slam dunk in the world of investing and Chinese regulatory bodies pose an unquantifiable risk to investors given how unpredictable they can be.

So too competitive pressures from JD.com and Alibaba cannot be underestimated. Both firms have the capital reserves and capabilities to start price wars.

Another less obvious but very real risk factor stems from quality controls that may be threatened as the company scales. Allegations of counterfeit goods and substandard products create reputation risks.

More generally, the company is very dependent on the end-consumer and so macroeconomic slowdowns in China and the US will pose a serious threat to growth rates.

Finally, there are ongoing threats to the firm’s cybersecurity frameworks and technological innovations that create Black Swan threats which investors need to be aware of before getting overly aggressive.

All in all, though, the pros appear to outweigh the cons when it comes to this high-flying Chinese e-commerce stock and its potential to deliver outsized returns for investors going forward.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.