Shanghai, China-based e-commerce platform operator Pinduoduo Inc. (PDD) operates a mobile platform that provides value-for-money merchandise and interactive shopping options. PDD’s shares have slumped 61.8% in price over the past year and 42.7% over the past six months amid China’s tightening regulatory policies and deteriorating growth with new coronavirus outbreaks impacting consumer spending. PDD has faced investor pessimism due to China’s regulatory crackdown on the nation’s internet giants. Regulators have introduced a series of legislation. And GFM Asset Management’s Tariq Dennison expects the crackdown to last “at least another 20 or 30 years.”

Furthermore, adding to the investors’ worries is the deteriorating China-U.S. relationship. The U.S. government has moved toward delisting Chinese companies from U.S. stock exchanges for non-compliance with Washington’s disclosure requirements, with the SEC mandating foreign companies to open their books to U.S. scrutiny. PDD shares retreated on the news.

The stock has gained 6.8% in price over the past five days and 4.6% intraday to close yesterday’s trading session at $64.35. However, according to analysts at Societe Generale said, “We think the worst of the tech regulatory storm is behind us, even though the regulatory upgrade is not yet over and will have a lasting impact on the tech sector’s long-term growth prospects.”

Here is what could shape PDD’s performance in the near term:

Missed Quarterly Revenue Expectations

PDD’s total revenues have increased 51% year-over-year to RMB21.51 billion ($3.34 billion), missing the Street’s revenue estimate by 16.6%. Its average monthly active users rose 15% from the same period last year to 741.50 million. Its operating profit came in at RMB2.14 billion ($332.01 million), up substantially from its year-ago loss. And its non-GAAP net income attributable to ordinary shareholders was RMB3.15 billion ($488.90 million), versus RMB466.40 million in the prior-year quarter. The company’s non-GAAP earnings per ADS were RMB2.18 ($0.34), indicating a 560.6% increase year-over-year.

However, its average monthly active users’ growth has slowed as the pandemic-fueled online shopping boom has waned, with customers returning to in-person shopping. Moreover, COVID-19 outbreaks in China have caused consumers to become more cautious about spending. Chief Executive Chen Lei said the company would focus more on research and development, shifting from its earlier strategy of emphasizing sales and marketing.

Stretched Valuation

In terms of forward P/E, PDD is currently trading at 250.14x, which is 1,525.3% higher than the 15.39x industry average. Also, its 4.14 forward EV/Sales ratio is 215.6% higher than the 1.31 industry average. PDD’s 5.23x and 7.64x respective forward Price/Sales and Price/Book are 362.6% and 150.9% higher than the industry averages.

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 C grade for Momentum. The stock’s sluggish momentum over the past months justifies this grade.

The stock has a D grade for Value, which is consistent with its stretched valuation.

Among  50 stocks in the F-rated China industry, PDD is ranked #15.

Beyond what we have stated above, view PDD ratings for Growth, Stability, Sentiment, and Quality here.

View the top-rated stocks in the China industry here.

Bottom Line

PDD is one of the fastest-growing e-commerce companies in China. However, China’s tightening regulatory policies could impact its growth trajectory. Also, the stock might be subject to delisting from the NASDAQ stock exchange if the company fails to comply with a new SEC rule. Thus, we think it could be wise to wait for clarity in the company’s near-term prospects 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 rose $4.34 (+6.74%) in premarket trading Thursday. Year-to-date, PDD has gained 17.29%, versus a -4.42% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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