We came across a bullish thesis on PDD Holdings Inc. (NASDAQ:PDD) on ValueInvestorsClub by metanoia5. In this article, we will summarize the bulls’ thesis on PDD. The company’s shares were trading at $128.00 when this thesis was published, vs. the closing price of $92.35 on Apr 16.
PDD is a multinational commerce group that operates Pinduoduo, an e-commerce platform that offers products in various categories; and Temu, an online marketplace.
The business model of PDD is unique, enabling it to improve its buyer annual frequency from 17.5x in FY17 to 115.1x in FY23. This implies that a buyer makes a purchase after every three days. The frequency for BABA and JD falls far behind at 52x and 14.1x, respectively. The Chinese e-commerce space has an active user of 1 billion users and a higher buying frequency is the only way to achieve growth in Gross Merchandise Value (GMV). The fact that PDD has a diversified product mix comprising household goods, apparel and agricultural produce also enables it to cross-sell and achieve a higher GMV.
PDD also has access to good quality data of purchasing groups that allows it to maintain an adequate supply of hit products through timely communication with OEMs. Unlike Taobao whose suppliers are mostly merchants, PDD sources its products mostly from OEMs and this offers a faster turnaround with better pricing for customers.
PDD offers a more competitive margin due to its focus on algorithm design and customer data while peers like BABA and JD have a workforce that is heavy on offline procurement, sales and customer servicing. A better business model reduced sales and marketing expenses as a percentage of revenue from 102.5% in FY2018 to 33.6% in Q2-23. The core business offers an EBIT margin of 53% which is much higher than BABA (14.7%) and JD (2.5%).
One can also expect its other businesses namely DDG and Temu to reduce losses and turn profitable in the short term. DDG, the grocery delivery business, will benefit from the strong supply chain and capable leadership from the core business. This segment has already notched up the Average Order Value for PDD through cross-selling. For Temu, PDD offers cross-border opportunities and managed to double the Average Order Value by shifting the product mix from women’s clothing to household and personal care products.
PDD is available at 8.85x its trailing 12-month earnings and should achieve a 24% CAGR in earnings. The upside in earnings can be further boosted once Temu achieves breakeven by 2025, giving another 40% potential upside in its bottom line. With a potential high-growth business, sustainable profitability and improving non-core businesses, the stock is available at an extremely attractive valuation.
While we acknowledge the potential of PDD as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. 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 was originally published at Insider Monkey.
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