PDD(NASDAQ: PDD) is one of China’s fastest-growing e-commerce companies. In the years since its 2015 founding, it has attracted hundreds of millions of shoppers with its discount marketplace for group purchases. It later expanded its booming e-commerce platform into higher-end markets, directly linked farmers to shoppers with its agricultural marketplace, and expanded overseas with Temu, which enabled its Chinese merchants to sell inexpensive products directly to foreign buyers.
From 2016 to 2023, PDD’s revenue grew at a jaw-dropping compound annual rate of 142%. It also turned profitable in 2021, and its net income grew at a compound annual rate of 178% over the following two years. That helped drive PDD’s stock to a record high of $202.82 in February 2021 at the apex of meme stock mania.
Image source: Getty Images.
In the four years that followed, PDD’s stock dropped by more than 40%. However, that pullback has created a great opportunity to buy this high-growth stock, which might generate more than a 10-bagger gain over the next decade.
PDD entered the e-commerce market much later than Alibaba(NYSE: BABA) and JD.com(NASDAQ: JD), which were founded in 1999 and 1998, respectively. Yet, thanks to its four core strategies, PDD grew rapidly, started catching up to those two market leaders, and became China’s third-largest e-commerce company in terms of annual revenue.
First, PDD focused on expanding its Pinduoduo discount marketplace across China’s lower-income second- and third-tier cities instead of going head-to-head against Alibaba and JD in wealthy, first-tier cities like Beijing and Shanghai. PDD initially attracted those bargain-seeking shoppers with its steep discounts, off-brand products that closely resembled brand-name products, and social networking features that encouraged shoppers to team up in groups for cheaper bulk orders.
Second, PDD leveraged its initial growth spurt to gradually push back against Alibaba’s Taobao and Tmall, JD.com, and other e-commerce marketplaces in China’s first-tier cities. As it did so, it broadened its focus by adding more brand-name products to its offerings. As PDD scaled up its business, it streamlined its spending and phased out its lower-margin, first-party marketplace. That’s why its profits skyrocketed over the past three years.
Third, PDD disrupted supermarkets and other retailers by connecting farmers directly to shoppers with its online agricultural marketplace. Expanding that platform was costly, but it became a major growth engine that gave PDD a unique advantage against Alibaba and JD.com — which both mainly relied on their own brick-and-mortar stores and retail partners for fresh produce deliveries — in the online grocery market.
Lastly, PDD boldly launched its overseas marketplace, Temu, to challenge Amazon(NASDAQ: AMZN) and other overseas e-commerce giants. By directly linking its Chinese sellers to overseas buyers, Temu bypassed middlemen retailers, allowing it to sell products at lower prices than its regional competitors. It also pre-shipped many of those products to its warehouses in the U.S. to shorten delivery times and hedge against increased tariffs.
For 2024, analysts expect PDD’s revenue and EPS to rise 61% and 87%, respectively. For 2025, they expect its revenue and EPS to grow another 25% and 11%, respectively.
That impressive growth projection is based on the premise that China’s economy will stabilize, PDD can make market-share gains against Alibaba and JD, and its online agricultural marketplace and Temu will keep growing. Notably, PDD doesn’t face as many regulatory headwinds in China as Alibaba, which Beijing slammed with antitrust restrictions in 2021.
Those would be stellar growth rates for a stock that trades at just 10 times forward earnings. But for now, PDD’s valuations are likely being squeezed by the persistent tensions between the U.S. and China as well as the concerns about high tariffs and tighter trade restrictions under President Trump.
Let’s assume those headwinds dissipate over the next few years as cooler heads prevail. If PDD’s performance matches analysts’ estimates through 2026, grows its revenues and earnings at compound annual rates of 20% over the following nine years, and trades at a more reasonable 25 times forward earnings, its stock price could potentially rise by 22 times to around $2,640 a share by 2035.
Even if PDD grows at a slower rate and trades at a lower valuation at that point, its stock could still rise more than tenfold over the next decade as its booming business expands and evolves. Therefore, investors who expect PDD to maintain its momentum and overcome the near-term headwinds should take advantage of the fact that many investors are shunning China’s top growth stocks, and buy this unloved stock today.
Before you buy stock in PDD Holdings, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and PDD Holdings wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $726,481!*
Now, it’s worth notingStock Advisor’s total average return is835% — a market-crushing outperformance compared to164%for the S&P 500. Don’t miss out on the latest top 10 list, available when you joinStock Advisor.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends Alibaba Group and JD.com. The Motley Fool has a disclosure policy.
