PDD Holdings stock has rebounded but Temu risks remain

PDD Holdings’ (PDD) stock price has staged a strong comeback in the past few weeks as investors embraced a risk-on sentiment. It has risen in the last five consecutive days, paring back the losses made in August after it published relatively weak financial results.

PDD was trading at $135.38, its highest point since August 8, and over 54% from its lowest point this month. 

Its stock’s comeback has coincided with the recovery of other Chinese equities. The Hang Seng index has jumped to H$21,345, its highest point since February, and 43% from the year-to-date low. 

Similarly, other technology companies in China have done well recently, with Alibaba, Meituan, and Baidu surging by double digits.

The current catalyst for the recovery is last week’s stimulus by the Chinese government, which unveiled several measures last week. One of the measures by the PBOC will unlock funds worth billions of dollars, which will be used to buy stocks.

PDD Holdings growth is slowing

PDD is a leading Chinese technology company that runs Pinduoduo, one of the most popular e-commerce companies. Its platform is used by millions of customers each month. PDD also runs Temu, one of the fastest-growing e-commerce companies globally. 

The most recent financial results showed that its revenue jumped by 86% in the second quarter to over $13 billion. Most of this revenue growth was because of its Temu brand, which has been seeing strong traction worldwide.

However, as PDD has done before, it did not provide details about its Temu business in terms of revenues, losses, and users. 

PDD’s income attributable to shareholders rose to $4.4 billion, a 144% increase from the same period last year. 

The stock plunged after those earnings after the company warned of challenges and hinted that it would continue boosting its investments. The CEO said:

“We will invest heavily in the platform’s trust and safety, support high-quality merchants, and relentlessly improve the merchant ecosystem. We are prepared to accept short-term sacrifices and potential decline in profitability.”

Temu concerns remain

PDD Holdings launched Temu to diversify its business in other countries, especially after China’s slowdown continues.

The challenge, however, there are signs that Temu’s business is slowing. Data by SimilarWeb showed that the company’s visitors rose by about 2.4% to over 684.4 million last month. A few months before, Temu was seeing strong double-digit growth.

For starters, Temu is a platform that lets users buy cheap items directly from Chinese sellers. It uses third-party sellers and then takes a small commission for each sale made on the website.

Temu’s business has been tried before and failed. The closest example is Wish, which offered cheap items to global customers. While Wish was highly popular, its sales dropped, and it was ultimately sold for a bargain price.

PDD has a strong balance sheet

PDD Holdings has one of the best metrics in the corporate industry. First, it is a highly profitable company, with some of the highest margins. It has a gross profit margin of 62%, higher than the sector median of 37%. 

Its EBITDA and net profit margin has grown to 28.60% and 28.0%, respectively. These numbers are higher than the industry margins of 11% and 4.5%, respectively.

PDD generates these profits because it operates an asset-light business, where it makes money for all transactions that passes in its platform. 

Additionally, PDD has one of the best balance sheets globally. It has over $7.8 billion in cash and equivalents, $8.1 billion in restricted cash, and over $31 billion in short-term investments. Its total current assets are almost $50 billion, meaning that it is making substantial sums of money in interest. 

Its most interest and income was over $1.3 billion in the last quarter while its interest expense was zero since it has limited debt. 

Analysts believe that the stock has more upside, with the average estimate being $160, up by almost 20% from the current level. 

PDD Holdings stock price analysis

PDD chart by TradingView

The daily chart shows that the PDD share price bottomed at $88.13 on August 28, and has bounced back by over 53% to $135.40. It has jumped above the 50-day and 100-day Exponential Moving Averages (EMA).

The Relative Strength Index (RSI) and the MACD indicators have pointed upwards while the stock has jumped above the ichimoku cloud. Therefore, the stock will likely continue rising as bulls target the key resistance point at $153, its highest point in January and August 2024.

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