Pinduoduo Inc. (PDD), a mobile-only marketplace that connects millions of agriculture producers with consumers across China, has gained 299% over the past year. This is due primarily to the company’s commitment to building an agriculture-focused logistics infrastructure platform that will reduce waste, lower costs and speed up the delivery of agricultural products. However, the recent tech sell-off has driven a 23.4% year-to-date loss for this overvalued stock.
Although PDD’s revenues are on an upward trajectory, the company is incurring heavy losses. The stock is currently trading 36% below its 52-week high of $212.6 because investors are concerned about the disconnect between its sky-high valuation and its financials.
Furthermore, Chinese authorities are perturbed by PDD’s increasing market concentration in the tech sector. This, coupled with internal business disruptions, has heightened uncertainty regarding the company’s future.
Here are the factors that we think could influence YVR’s performance in the near term:
Robust Sales Growth
As PDD has begun ramping up monetization of its sizable customer and merchant base. Its revenues are expanding rapidly. Its total revenues have increased 146% year-over-year to $4.07 billion in the fourth quarter, ended December 31, 2021. Its average monthly active users in the quarter were 719.9 million, representing an increase of 49.5% from their year-ago value. And the company’s commitment to building an agriculture-focused logistics infrastructure platform that will reduce waste, lower costs and speed up the delivery of agricultural products is helping it secure rising revenues.
The Anti-Trust Scrutiny
As Chinese tech giants have amassed significant market power, they have become the targets of antitrust scrutiny by regulators. The Chinese government is using antitrust laws as a powerful tool to tackle monopolies with the goal of maintaining price stability. Earlier this month, China fined PDD’s community group-buying platforms and four other operators for allowing excessive subsidies in the second half of 2020 that disrupted market order. The State Administration of Market Supervision fined PDD’s Duo Duo Maicai 1.5 million Yuan ($230,000).
Non-Profitable, yet Trading at a Premium Valuation
PDD has not been able to translate its top-line growth into overall profitability. The company reported an operating loss of $313.83 million for the fourth quarter ended December 31. Its net loss stood at $210.94 million, and its loss per ADS was $0.17. However, the stock has gained 77.5% over the past six months, but its current valuation is detached from its current fundamentals. In terms of forward-12-month price/sales, the stock is currently trading at 10.70x, which is significantly higher than the industry average1.24x. Also, in terms of forward-12-month price/book, the stock is currently trading at 23.92x, much higher than the industry average 3.66x.
There has been widespread online criticism of the intense work culture across China’s booming tech industry. Last December, a female employee died after collapsing after leaving work. Her death sparked a social media backlash against PDD. Following the incident, Chinese authorities began a probe working conditions at PDD. Such actions have caused a fostered instability and disrupted the normal functioning of the business.
Decent Growth Momentum
Analyst expects PDD’s revenues to rise 322.7% year-over-year to $3.01 billion in the current quarter, ending March 31, 2021. A consensus EPS estimate for the first quarter represents a slight improvement from the year-ago value.
POWR Ratings Don’t Indicate Enough Upside
PDD has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. PDD has a C grade for Growth also. This is consistent with analysts’ expectations that its revenue will increase in the coming months, but its EPS will remain negative in fiscal 2021.
The stock also has a C grade for Momentum, which is in sync with its 77.5% gains over the past six months and 27.6% loss over the past month.
Furthermore, PDD has a D grade for Value. This is justified given its forward enterprise value/sales of 10.10x, which is more than 494% higher than the industry average 1.70x. And its forward price/sales of 10.70x is also significantly higher than the industry average1.24x.
PDD is ranked #56 of 89 stocks in the D-rated China group.
Click here to see PDD’s POWR Ratings for Stability, Sentiment and Quality as well.
Better than PDD: Click here to access 13 top-rated stocks in the China group.
Despite the stock delivering significant returns over the past year, PDD’s growth potential looks weak given its bleak financials and business uncertainty. So, we think investors should hold off on investing in PDD in the near term.
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PDD shares were trading at $124.18 per share on Wednesday afternoon, down $11.88 (-8.73%). Year-to-date, PDD has declined -30.11%, versus a 3.99% rise in the benchmark S&P 500 index during the same period.
About the Author: Rishab Dugar
Rishab is a financial journalist and investment analyst. His investment approach is to focus on quality stocks, trading at low prices, with business models that he readily understands. More...
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