PDD Holdings Inc (PDD, Financial), a rapidly growing Chinese e-commerce giant, continues to expand its business at an impressive pace. The company recently announced substantial quarterly earnings, showing significant growth in both its top and bottom lines. Following the earnings release, PDD's share price surged by 18% in just one trading day. Over the past six months, the stock has more than doubled, climbing from $62 per share in May to nearly $143 per share currently. Let's dig into the company's operating performance and valuation to determine if it is a good option for investors now.
āTeam purchaseā business model
PDD is the operator of the Pinduoduo and Temu platforms, which offer a wide range of value-for-money products, including shoes, bags, furniture, household items, food and beverages, personal care products and much more. It promotes a unique "team purchase" approach, where consumers are encouraged to share product information within their social networks and invite friends to join them in group purchases. This strategy not only allows consumers to access significantly better prices when buying as a team, but also integrates a social element that cultivates a highly engaged user base.
Soaring revenue and profitability turnaround
Since its inception in 2016, PDD has experienced remarkable growth in revenue, soaring from approximately 505 million yuan ($70.47 million) in 2016 to an impressive 130.5 billion yuan in 2022. This growth represents a compounded annual growth rate of 152% over the past six years. Initially, PDD faced operating losses, which expanded from 286 million yuan in 2016 to about 9.4 billion yuan in 2020. However, the company quickly reversed this trend, turning these losses into substantial profits. The operating income saw a significant increase, multiplying by more than four times from nearly 6.9 billion yuan to over 30.4 billion yuan within just one year.
Furthermore, the company's operating cash flow has consistently remained positive since 2016, skyrocketing by 55 times from 880 million yuan to 48.5 billion yuan during this period. The free cash flow has also grown from 877 million yuan to 47.9 billion yuan in the past six years. This consistent positive cash flow, even during periods of operating losses, suggests PDD has been effective in managing its cash resources.
In the third quarter, PDD continued to exhibit significant growth, with total revenue soaring by 95% to exceed 68.8 billion yuan. While the majority of its revenue came from online marketing services, this impressive growth was primarily driven by transaction services, which saw a staggering 315% increase compared to the previous year. In comparison, online marketing services experienced a more modest growth of 39%. Additionally, operating income witnessed a significant rise of 60%, climbing from 10.4 billion yuan to 16.7 billion yuan. Since becoming profitable, the company has experienced a substantial return on capital. 2022's return on capital reached 22.6%, and it continues to trend upwards, bolstered by consistent growth in revenue and profitability.
Strong balance sheet
The company has a super strong balance sheet. As of September, it had 54.9 yuan in cash and cash equivalents and 56.4 billion yuan in restricted cash. The short-term investments came in at 147.9 billion yuan, consisting of time deposits and held-to-maturity debt securities, trading securities and convertible-bond investments. Another aspect not fully represented on the balance sheet is the company's intellectual property. By the end of 2022, the company had registered 92 copyrights for computer software essential to its operations, obtained registrations for 1,600 trademarks and filed applications for 1,419 additional trademarks in China. On the liabilities side, it had only convertible bonds with the total value of roughly 17 billion yuan. The lease liabilities came in at only 3.7 billion yuan.
It is quite undervalued now
PDD is projected to maintain its revenue growth, though the rate of increase may decelerate as revenues rise. Anticipating an average annual growth of 30%, the comapny's revenue could reach approximately 485 billion yuan by 2027. Factoring in an estimated 20% operating margin, the operating income might be around 97 billion yuan. With a 30 times earnings multiple, the total enterprise value could reach about 2.9 trillion yuan, or around $407 billion, which is 2.4 times its current trading price. Alternatively, using a more conservative 20 times earnings multiple, PDD's valuation would be 1.94 trillion yuan, still 60% above its current trading value.
Conclusion
PDD Holdings presents a compelling investment opportunity. The company's innovative approach to e-commerce through its unique team purchase model has not only disrupted the market, but also fostered a deeply engaged consumer base. With its track record of exponential revenue growth and a successful pivot from operating losses to substantial profits, PDD has demonstrated exceptional financial resilience and operational efficiency. The company's robust balance sheet, with significant cash reserves and minimal liabilities, further underscores its financial health.
The impressive growth in key financial metrics such as operating income, cash flow and return on capital, combined with the company's solid intellectual property portfolio, positions PDD as a strong player in the highly competitive e-commerce sector. While the projected slowdown in revenue growth rate is a consideration, the company's potential to significantly increase its enterprise value over the next few years offers an attractive proposition for investors. Whether using a 30 times or a more conservative 20 times earnings multiple, PDD's projected valuation far exceeds its current trading price, highlighting its potential for considerable appreciation.
