Is Pinduoduo a Buy Under $60?
Pinduoduo (PDD) is one of China’s fastest-growing e-commerce companies, with more than 700 million average active users. But though analysts expect the company to grow at an accelerated pace in...
Pinduoduo (PDD) is one of China’s fastest-growing e-commerce companies, with more than 700 million average active users. But though analysts expect the company to grow at an accelerated pace in the near term, is PDD a buy at its current price after the SEC adopted the Holding Foreign Companies Accountable Act yesterday? Read more to find out.
Pinduoduo Inc. (PDD) is a mobile e-commerce platform that operates in China. Headquartered in Shanghai, PDD is known for its assortment of value-for-money goods and interactive shopping options.
The price of PDD’s ADR has been declining over the past year due to concerns surrounding the potential delisting of Chinese stocks that are non-compliant with the SEC rules.
The stock has declined 66.6% in price year-to-date to close yesterday’s trading session at $59.28.
Here is what could shape PDD’s performance in the near term:
Third Quarter Results Below Analyst Estimates
PDD has benefited from remote lifestyle trends as the demand for online shopping skyrocketed. However, the company missed Street estimates in its last reported quarter as its growth rate slowed down.
In its fiscal third quarter, ended September 30, 2021, PDD’s total revenues increased 51% year-over-year to RMB21.51 billion ($3.34 billion). However, the company missed the Street’s RMB26.59 billion ($4.17 billion) revenue estimate by 19.1%.
Its average monthly active users rose 15% from the same period last year to 741.50 million. Its non-GAAP operating profit and net income came in at $506.10 million and $488.90 million, respectively, indicating substantial improvement from their negative year-ago values.
Regarding this operating profit growth, Managing Director of Hong Kong-based brokerage Haitong International Natalie Wu said, “Pinduoduo’s growth rate is stabilizing as they approach 900 million users.” In addition, independent internet analyst Liu Xingliang said, “The phase of aggregating large number of new users is over.”
Solid Growth Prospects
The consensus revenue estimates indicate a 20.8% improvement year-over-year in PDD’s fiscal fourth quarter (ending December 2021), a 71.5% rise in the current year, and a 34.4% increase next year. PDD’s EPS is expected to rise 1,850% in the current quarter, 223.1% in the current year, and 145.8% next year.
New SEC Rules Might Result in Potential Delisting
The SEC yesterday adopted amendments to implement the Holding Foreign Companies Accountable Act (HFCAA), under which foreign companies listed on U.S. stock exchanges could be delisted if they fail to comply with U.S. auditing and regulatory requirements. Under this Act, foreign companies must let the Public Company Accounting Oversight Board (PCAOB) audit their books for three consecutive years and declare if it is owned or controlled by any foreign government.
The HCFAA was passed in 2020 after several Chinese and Hong Kong-based companies listed in the United States did not provide their books to the U.S. regulators. SEC Chair Gary Gensler stated that these countries have a long-standing history of not complying with the PCAOB inspection policies.
Based in Shanghai, PDD might be delisted if it fails to comply with the new SEC rules.
Chinese Antitrust Policies Limiting Growth Opportunities
PDD, one of the fastest-growing e-commerce companies in China, has been negatively impacted by the ongoing Chinese crackdown on big tech. As a result, prominent institutional investors, such as Neil Shen, the head of Sequoia Capital China, sold approximately $215 million worth of PDD shares. PDD’s top executives, including Chairman and CEO Chen Lei, sold around $7 million worth of PDD shares in September.
POWR Ratings Reflect Uncertainty
PDD has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
PDD has a Sentiment grade of B and a Momentum grade of C. The company’s favorable growth outlook and analyst estimates justify the Sentiment grade. However, the stock is currently trading below its 50-day and 200-day moving averages of $89.38 and $114.67, respectively, in sync with the Momentum grade.
Of the 52 stocks in the F-rated China group, PDD is ranked #16.
Beyond what we have stated above, view PDD Ratings for Growth, Stability, Value, and Quality here.
Analysts expect PDD’s growth trajectory to continue in the near term, given its growing market share and promising expansion policies. However, new SEC regulations announced yesterday might lead to PDD being delisted from the Nasdaq Stock Exchange, causing U.S. shareholders to lose out. Thus, we think investors should wait to see whether PDD complies with U.S. laws before investing in the stock.
How Pinduoduo Inc. (PDD) Stack Up Against its Peers?
While PDD has a C rating in our proprietary rating system, one might want to consider taking a look at its industry peers, NetEase Inc. ADR (NTES), China Biologic Products Holdings, Inc. (CPBO), and FinVolution Group (FINV), which have a B (Buy) rating.
PDD shares fell $2.80 (-4.72%) in premarket trading Friday. Year-to-date, PDD has declined -68.30%, versus a 23.78% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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