We recently compiled a list of the 10 Best E-Commerce Stocks To Invest In. In this article, we are going to take a look at where PDD Holdings Inc. (NASDAQ:PDD) stands against the other e-commerce stocks.
An Overview of the E-Commerce Industry
According to a report by Forbes, the e-commerce industry is expected to grow to a valuation of $7.9 trillion by 2027 from $6.3 trillion in 2024. In 2027, 23% of retail purchases are expected to be made online, up from 20.1% in 2024.
An increase in consumer confidence, after a period of sluggish growth, has been a key catalyst in improving the position of the e-commerce industry. On July 30, Reuters reported that the consumer confidence index, in the US, increased to 100.3 in July after it was revised down to 97.8 in June. Previously, experts predicted the index to fall to 99.7 after reaching 100.4 basis points. Chief Economist, Dana Peterson, suggested that while consumers remain resilient they are concerned over rising prices and interest rates. However, despite an uncertain macroeconomic environment, e-commerce companies are taking advantage of the current consumer sentiment by reducing prices. Companies like Target have also revised their profits for FY 2024 as lowered prices have drawn more customers.
To shed light on the state of online retail, US Mastercard Economics Institute Chief Economist, Michelle Meyer appeared in an interview on Yahoo Finance on August 16. Online retail sales went up by 8.2% in July, compared to a 2.9% growth rate in July 2023. She further explains that personal finances, time efficacy, and the overall state of the labor market impact which sites consumers choose to shop from. Meyer also added that in the past quarter, the average individual in the United States saw an appreciation in wealth, which has a positive bearing on consumer spending and therefore online retail.
What Does the Competitive E-Commerce Landscape look like?
The future of e-commerce is unpredictable. Bans on products from China, questions about cheap labor, criticism over fast fashion, and the increasing use of technology are different forces shaping the industry. In the first quarter of 2024, the US pushed to ban TikTok in the country, which mongered fear among Chinese e-commerce sites such as Shein and Temu. In April, law-making agencies in the US suggested a ban on Temu over labor rights infringement. Moreover, on August 21, Shein sued Temu over copyright infringements. The former suggested that Temu stole the company’s designs and trade secrets resulting in Temu losing money over every sale. Despite such, the founder of Temu, Colin Huang, stands as the wealthiest person in China with a net worth of $51.4 billion, as of August 22. You can also take a look at the best Chinese stocks to buy now.
On the other hand, e-commerce sites in the United States are trying to win against their competitors using advanced technology. Walmart, for instance, launched a generative AI search tool that customers can prompt and get a list of ideal products or items needed. For example, a customer who wants to throw a birthday party, but is unaware of the items needed, could use the search tool to save time. Similarly, Amazon launched Rufus, an AI shopping assistant, earlier this year. Rufus is capable of personally assisting a shopper and helping them find the right products. While we discuss technology, we cannot ignore eBay’s magical listing tool for sellers backed by artificial intelligence. The tool can analyze images, categories, and titles to curate product descriptions, prices, and shipping costs. You should also read our piece on the latest AI news and analyst ratings you should not miss.
As the e-commerce industry grows, it is crucial to know which companies are pioneering the race. You can also read our piece on the best advertising stocks to buy according to short sellers.
Our Methodology
To compile the list of the 10 best e-commerce stocks to invest in, we looked at holdings of e-commerce ETFs and screened for Internet Retail companies on the Finviz stock screener. We sorted our screen by market cap and looked at the 20 largest e-commerce companies. We picked stocks that were the most widely held by institutional investors, as of Q2 2024. The list is in ascending order of the number of hedge fund holders for each stock.
Note: All pricing data is as of August 22.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close-up of a customer using the company’s e-commerce platform whilst shopping online.
PDD Holdings Inc. (NASDAQ:PDD)
Number of Hedge Fund Holders: 86
PDD Holdings Inc. (NASDAQ:PDD) is one of the biggest e-commerce companies to invest in. The company is a multinational e-commerce group that owns Temu and Pinduoduo, two online retail sites, and holds a 20% market share in China’s e-commerce industry.
Pinduoduo is one of the most prominent online agriculture retail platforms in China. Temu, on the other hand, is an e-commerce platform in the United States and Europe that sells clothing, home decor, beauty, and handmade items.
PDD Holdings’s (NASDAQ:PDD) business model is such that it facilitates bulk buying. Customers can directly haul goods in bulk from manufacturers, eliminating intermediaries, and reducing costs. Temu, known for its notoriously low-priced products and fast deliveries, has partnerships with major distributors such as UPS, FedEx, and USPS to ensure all deliveries are made quickly and securely.
According to HSBC, the Chinese e-commerce market was valued at $155 billion in 2019 and is expected to grow to $500 billion by the end of 2025 from a valuation of $350 billion in 2023. Over 60% of the Chinese population uses online retailers to shop and 37% of retail spending in the country is executed via e-commerce channels. While the Chinese market is saturated, the markets in the US and Europe are attractive given that online shopping accounts for 22% of retail spending in the US and 16% in Western Europe.
PDD Holdings’s (NASDAQ:PDD) presence in China warrants its position as one of the best e-commerce stocks to buy. With a 20% market share in the country and a growing platform in Europe and North America, PDD’s Temu is set to become one of the most used platforms in the world. Over the past year, PDD’s growth has been exemplary. In the first quarter of 2024, PDD Holding’s total revenue reached RMB 86.8 billion, a 131% increase year-over-year.
Overall, 86 investors were bullish on the stock at the end of Q2 2024, with total stakes amounting to $8.1 billion. As of June 30, GQG Partners was the largest shareholder with a position worth $1.44 billion.
PDD is attractive at current levels. The stock is trading 11 times its forward earnings, a discount of 29% from its sector P/E, and analysts expect earnings to expand by 84% this year and 139% in 2025, from 2023.
Baron Funds stated the following regarding PDD Holdings Inc. (NASDAQ:PDD) in its fourth quarter 2023 investor letter:
“We added to our digitization theme by building a position in PDD Holdings Inc. (NASDAQ:PDD), a leading Chinese e-commerce platform. Founded in 2015, the company has emerged as China’s second largest e-commerce player, capturing approximately 20% market share. In our view, PDD’s competitive moat lies in its team purchase model that facilitates bulk buying through direct partnerships with manufacturers, thereby eliminating intermediaries (e.g., distributors and middlemen) and lowering costs. Key factors driving the company’s meteoric growth include rising consumer demand for affordable products in China amid an economic slowdown, small-scale merchants seeking alternatives to Alibaba, and superior management execution. PDD’s revenue growth outpaces gross merchandize value growth owing to rising take rates as merchants aggressively compete for consumer traffic on the platform. In our view, PDD should continue to gain market share given its dominance in the value-for-money segment, growing affordable branded product offerings, and high operational efficiency. We believe the company’s growth will be further supported by the recent launch of its international e-commerce platform, Temu, which has become one of the fastest growing apps globally. Leveraging China’s excess manufacturing capacity, Temu has strong negotiating power with domestic suppliers and attracts global consumers with competitively priced products. Temu’s recent initiatives to improve unit economics, coupled with achieving variable breakeven in the sizable U.S. market, showcase management’s skill and commitment to sustained growth. We expect PDD to at least double its earnings and free cash flow in the next three years, with the potential for continued compounding thereafter.”
Overall PDD ranks 4th on our list of the best e-commerce stocks to buy. While we acknowledge the potential of PDD as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PDD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
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