Despite explosive revenue growth in 2024, PDD’s (NASDAQ: PDD) share price has not fared well. Shares are down 29% on the year as of the December 12 close. Shares were crushed following the company’s past two earnings releases after missing estimates on sales. Metrics now show the stock is much cheaper than at 2024's start. So, have expectations been reset to a more reasonable level to warrant a recovery in this stock in 2025? I’ll provide my take after explaining PDD’s business and highlighting two key risks.
PDD’s Differentiated E-Commerce Platforms
PDD has become a staple in the e-commerce marketplace. Its business revolves around two e-commerce platforms: Pinduoduo and Temu. Pinduoduo caters to consumers in China. It utilizes a “group-buying” strategy. This strategy incentivizes consumers to form groups that purchase items together. The more customers who participate in the purchase, the less each customer has to pay. Pinduoduo is deeply integrated with the largest social messaging app in China, WeChat. This integration lets Chinese consumers easily share their targeted items.
Features that are more typically embedded in mobile games also serve to keep customers interacting with the platform. Timed challenges, where users attempt to reach a threshold of others joining their group within a certain period, are an example. Overall, the platform leverages powerful behavioral biases that humans have to keep users engaged. This includes fear of missing out, herding, and social proof.
Temu operates as a more traditional e-commerce space, much like Amazon (NASDAQ: AMZN). It targets the rest of the world, allowing Pinduoduo to focus on China. Temu has a lower emphasis on group-buying and gamification aspects that Pinduoduo champions. It opts to compete by offering super-low prices by sourcing its products directly from Chinese manufacturers.
The company breaks down its revenues into marketing services and transaction revenue. Marketing revenue comes from advertisements that sellers buy or other ways they can pay for more visibility on their products. Transaction revenue comes from the commissions PDD charges for each item sold. Last quarter, the split between the revenue streams was essentially even. However, transaction revenue grew at a rate three times faster than marketing revenue.
Key Risk: U.S. Government Appears to Have Temu 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 under $800 are exempt from tariffs. Due to Temu’s low-cost products, it has been able to use this to its advantage. However, serious proposals exist to completely eliminate this exemption on items like apparel, footwear, and household goods. Temu sells a lot of these products. This would raise costs for Temu, pressuring both margins and sales. However, even with added tariffs, it would still be very difficult for others to compete with Temu’s prices.
A slowdown in the Chinese economy is another risk. However, Goldman Sachs Group (NYSE: GS) only sees Real gross domestic product growth dropping by 0.4% in 2025. Government stimulus should help temper the effects of U.S. tariffs.
PDD Looks Poised for Recovery in 2025 When Comparing to Peers
It is important to note that PDD’s platforms are simply marketplaces. They don’t hold onto much inventory themselves, nor do they operate warehouses that hold inventory for sellers. The sellers are responsible for product manufacturing and fulfillment. This asset-light model differentiates itself from Chinese competitors JD (NASDAQ: JD) and Alibaba (NYSE: BABA). This difference affords PDD much higher margins.
Analysts expect revenue to grow at 32% over the next 12 months, and they anticipate adjusted earnings per share to grow at 16%. Both of those figures are significantly higher than projections for peers Alibaba and JD. Additionally, PDD’s margins are light-years better than JD's and significantly better than Alibaba's. Despite these differences, all three firms essentially trade at the same forward price-to-earnings (P/E) multiple. PDD’s forward P/E has fallen 60% this year to just over 9x.
PDD’s PEG ratio is also significantly below the other two firms, at around 0.4. This implies that markets value it relatively lower when considering its expected earnings growth. To me, shares of PDD have fallen too far, and expectations should be more reasonable at this point.
From Q3 2023 to Q2 2024, the company saw year-over-year revenue growth of over 80%, a difficult pace for any company to sustain. Its higher margins and higher growth rate justify a higher margin compared to its peers. This means PDD shares could see a big recovery in 2025.
