Traffic regulations today
(As of December 16, 2024 ET)
- 52 week range
- $88.01
▼
$164.69
- P/E ratio
- 9.73
- Target price
- $173.40
Despite explosive revenue growth in 2024, PDD NASDAQ: Traffic rules the share price is not very good. As of the close on Dec. 12, shares were down 29% year over year. The stock fell after the company’s last two earnings reports due to a lack of sales estimates. Indicators now show shares are much cheaper than they were at the start of 2024. So, have expectations been reset to more reasonable levels to ensure these stocks recover in 2025? I’ll give my point of view after I explain PDD’s business and highlight two key risks.
Differentiated e-commerce platforms PDD
PDD has become a staple in the e-commerce market. Its business revolves around two e-commerce platforms: Pinduoduo and Temu. Pinduoduo serves consumers in China. It uses a “group buying” strategy. This strategy encourages consumers to form groups that buy products together. The more customers involved in a purchase, the less each customer has to pay. Pinduoduo is deeply integrated with China’s largest social messaging app, WeChat. This integration allows Chinese consumers to easily share targeted products.
The features that are most often built into mobile games also help customers interact with the platform. An example would be timed challenges, where users try to reach a threshold of others joining their group within a certain period. Overall, the platform exploits powerful behavioral biases that people use to keep users active. These include fear of missing out, herding, and social proof.
Temu operates like a more traditional e-commerce space, much like Amazon. NASDAQ:AMZN. It targets the rest of the world, allowing Pinduoduo to focus on China. The topic has less emphasis on group buying and the gamification aspects that Pinduoduo champions. The company prefers to compete by offering ultra-low prices and purchasing products directly from Chinese manufacturers.
The company breaks down its revenue into marketing services and transaction revenue. Marketing income comes from advertising that sellers buy or other ways of paying for greater exposure for their products. Transaction revenue comes from PDD commissions on each item sold. Last quarter, the distribution between income streams was almost even. However, transaction revenue grew three times faster than marketing revenue.
Key risk: The US government appears to have Tema in its crosshairs
One significant risk for Temu is the new de minimis rules proposed by the Biden administration. The de minimis rule states that shipments of goods valued at less than $800 are exempt from duties. Thanks to the low cost of Temu’s products, she was able to use this to her advantage. However, there are serious proposals to completely remove this exemption for goods such as clothing, footwear and household goods. Temu sells many such products. This will increase costs for Temu, putting pressure on both profits and sales. However, even with the additional tariffs, it will be very difficult for others to compete with Temu’s prices.
Another risk is a slowdown in the Chinese economy. However, Goldman Sachs Group New York Stock Exchange: GS Real gross domestic product growth will decline by only 0.4% in 2025. Government stimulus should help soften the impact of US tariffs.
PDD appears poised for recovery in 2025 compared to peers
It is important to note that PDD platforms are simply marketplaces. They do not own much inventory themselves and do not have warehouses to store inventory for sellers. Sellers are responsible for the production and sale of goods. This asset lightening model differs from JD’s Chinese competitors NASDAQ: JD and Alibaba New York Stock Exchange: BABY. This difference gives PDD much higher profits.
PDD Stock Forecast Today
$173.40
74.08% Growth potentialModerate purchase
Based on ratings from 13 analysts
| High forecast | $272.00 |
|---|---|
| Average forecast | $173.40 |
| Low forecast | $105.00 |
PDD Stock Forecast Details
Analysts expect revenue to grow 32% over the next 12 months and adjusted earnings per share to rise 16%. Both of these figures are significantly higher than forecasts for peers Alibaba and JD. Additionally, PDD’s profit margins are light years higher than JD’s and significantly higher than Alibaba’s. Despite these differences, all three firms essentially trade at the same forward price/earnings (P/E) multiples. PDD’s forward P/E has fallen 60% this year to just over 9x.
PDD’s PEG ratio is also significantly lower than the other two firms, at around 0.4. This means markets are valuing it relatively lower when expected earnings growth is taken into account. In my opinion, PDD stock has fallen too far and expectations should be more reasonable at this point.
From the third quarter of 2023 to the second quarter of 2024, the company’s annual revenue growth was over 80%, a difficult pace for any company. Its higher margins and higher growth rate justify higher margins compared to its peers. This means PDD shares could recover significantly in 2025.
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