The stock market has a long history of throwing up incredible bargains. So much so that even the fastest-growing growth names can sometimes end up looking like a value stock (in hindsight, of course).
Take PDD Holdings (NASDAQ: PDD) for example, which has just posted 144% profit growth. Yet the stock’s plunged 35% in a week, leaving it on a forward price-to-earnings (P/E) ratio of just 7.5.
Is this now an unmissable bargain? Here’s my take.
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What is PDD Holdings?
For those unfamiliar, this is the parent company of Pinduoduo, the gamified shopping platform in China where users get discounts by purchasing in groups. Today, it’s China’s third-largest e-commerce company by sales, trailing only JD.com and Alibaba.
Temu, its overseas business, has spread like wildfire since it launched just two years ago. I popped on the app a few weeks ago, quickly becoming frustrated as its spinning wheel locked me in before dishing out a “free” product (if I spent a minimum of £15).
The products were dirt cheap, but they were of varying quality when they finally arrived. Let’s just say I won’t be cancelling my Amazon Prime subscription!
Why has PPD stock crashed?
In the second quarter, the e-commerce firm’s revenue surged 86% year on year to $13.4bn. Gross margin improved 1% to 65.3% while net income skyrocketed 144% to $4.4bn.
These incredible numbers were then followed by this bleak warning from management: “While encouraged by the solid progress we made in the past few quarters, we see many challenges ahead“.
It then laid out a load of them, ranging from rising competition to a transition away from “low-quality” merchants. However, one comment (from many) on the earnings call that probably spooked investors was this: “In the long run, the decline in our profitability is inevitable”. Yikes!
A possible mirage
The stock’s collapse has left it trading on a P/E ratio of just 10. That’s the sort of multiple you’d expect to see from a FTSE 100 bank, not a tech firm notching up 86% revenue growth.
The forward P/E ratio of 7.5’s actually lower than Alibaba, which is only growing in the single digits these days.
However, I’d take that figure with a pinch of salt because management’s already warned that falling earnings is “inevitable“. The ultra-low PDD valuation might well turn out to be a mirage.
I’m wary
Other things said by management highlighted why I don’t tend to invest in Chinese stocks. There was talk about being “committed to transitioning toward high-quality development” and “prepared to accept short-term sacrifices” to “vigorously support high-quality merchants“.
Committed and prepared for sacrifices? I read this as PDD very publicly aligning itself with Beijing’s authorities. That’s understandable given that President Xi Jinping has vowed to make “high-quality development” the guiding force of the Chinese economy. Woe betide those that don’t get onboard.
This emphasises again the tightrope that Chinese tech companies must walk. The shifting sands of the regulatory environment just creates too many complexities and risks that I don’t feel comfortable with.
At $93, PDD stock could prove to be an unmissable bargain. After all, the e-commerce firm’s still growing rapidly around the world. However, this is one opportunity I’m happy to let pass by.
