PDD Holdings (NASDAQ:PDD) is a Chinese online retail company that owns the popular Temu marketplace.
Unsurprisingly, PDD stock has struggled amid higher trade barriers and has fallen by over 13 percent in the last 12 months.
In many cases, though, short-term periods of difficulty create attractive entry points for investors to buy stocks at discounted prices.
Today, let’s take a look at where PDD could be one year from now and whether the stock is a buy at the moment.
How Tariffs Have Disrupted Temu
One of the largest blows to PDD over the last year has been the Trump administration’s decision to end America’s de minimis exemption, a rule that allowed packages valued at under $800 to enter the country without being subject to tariffs and duties.
This exemption had been key to the business models of direct shippers like Temu and Shein, allowing them to ship packages directly from China to US consumers and undercut more traditional retail and eCommerce competitors in the process.
With the de minimis exemption ending, PDD is expected to have to raise prices on Temu. As a result, PDD will lose a large portion of its competitive edge in the American market. The outcome is likely to be a fundamental change in how PDD approaches its US business, with a greater focus on third-party sellers and more expensive goods in place of its previous low-budget value proposition.
Even more concerning for investors may be the mercurial and unpredictable nature of US trade policy at the moment. With the shakeup that US tariff rates and other trade practices have seen this year, it’s difficult for PDD or its shareholders to accurately predict what the business environment will look like in the future.
More Troubles in China
While the effect of rising tariffs on goods sold abroad is likely PDD’s largest challenge, it also faces headwinds in its domestic market. Chinese consumer spending has stagnated as a result of both slower wage growth and general economic uncertainty.
Given China’s well-known cultural preference for high savings rates to begin with, these factors could push Chinese consumers into a fairly long period of depressed spending that would impact PDD’s business in its home country.
The slowdown in consumer spending in China has been so pronounced that it has even started to weigh on the country’s economic growth.
Though the Chinese economy turned in better-than-expected growth of 5.2 percent in Q2, that rate is expected to slow further in the second half of the year. Given PDD’s high level of exposure to the discretionary consumer market, these trends could have a deeply negative effect on the business.
PDD’s Growth Prospects
In Q2, PDD reported a surprisingly strong revenue growth of 7 percent to $14.5 billion. Operating profits, however, dipped by 21 percent, reflecting the challenges that PDD is facing both at home and abroad. Though decent considering all of the difficulties the business is trying to navigate, the revenue growth rate paled in comparison to the double and even triple-digit revenue growth PDD has maintained throughout the majority of its public history.
Looking forward, analysts only expect EPS growth of 3.4 percent on an annualized basis from PDD over the next 3-5 years.
While future trade deals or a relaxing of restrictions on the part of the US could cause PDD to outperform this estimate, the outlook for the eCommerce major could be fairly bleak in terms of growth if current trends continue. As such, investors may not be able to expect much upward pressure on share prices from earnings growth over the next year or even for the next several.
Is PDD a Value Buy?
Unsurprisingly, the many headwinds PDD is facing have brought the stock to a fairly low valuation. Shares of PDD currently trade at 13.7x earnings and 11.6x operating cash flow. On an earnings basis, the stock is materially cheaper than the sector average P/E of 17.7.
The selloff to this level, however, has been brought about by fundamental changes in the environment in which PDD operates. With blows to both its profitability and its competitive position, it’s difficult to say that PDD has become particularly cheap at its current price.
Where Will PDD Be Stock in 1 Year?
The average price target for the stock is $125.59, slightly below the most recent price of $127.11. It is worth keeping in mind, though, that the range of analyst forecasts for PDD is fairly broad.
The highest price target of $165.27 would imply an upside of 30 percent, while the lowest target of $87.07 would see the stock lose nearly half of its current value. Despite the comparatively low valuation, many analysts don’t expect significant upside from PDD in the coming 12 months.
If anything, the challenges that PDD faces may only get worse in the near future if the growth rate of the Chinese economy falls as predicted.
Though Temu will likely remain popular with US consumers, the cost advantages that allowed it to grow so quickly over the last few years have been blunted by the ending of the de minimis exemption and other trade policy changes. As such, PDD is now much more exposed to competition from traditional eCommerce platforms like Amazon.
Overall, PDD looks like a stock that could stagnate or even move lower over the coming year as the challenges it faces keep showing up on its top and bottom lines.
With ongoing pressure on the business from macroeconomic factors that are out of its control, it seems unlikely that PDD shares will be able to regain their momentum in the near future. Considering the large difficulties that still face PDD, the stock doesn’t look like a particularly attractive one to own at the moment.
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.