Why PDD Holdings plunged 25.4% in August

Shares of Chinese e-commerce disruptor PDD Holdings ( PDD 0.67% ) , formerly known as Pinduoduo and the parent company of Temu, plunged 25.4% in August, according to data from S&P Global Market Intelligence .

PDD Holdings reported second quarter earnings in late August. And while current results showed torrid growth and increased profitability, management warned of both a slowdown and declining margins looking forward. "We see many challenges ahead" In the quarter, PDD Holdings grew revenue 86% to $13.



4 billion, with adjusted ( non-GAAP ) earnings per American Depository Share of $3.20, up a whopping 122%. While the bottom-line figure trounced analyst estimates, even that 86% top-line growth fell a tad short.

But while second quarter earnings were "mixed," it was likely management's commentary on the forward outlook that spooked investors. Co-CEO Lei Chen said in the release the company sees "many challenges ahead," including heightened competition in China and other geographies, along with "external challenges." That's likely code for macroeconomic weakness in China , and potentially other geographies as consumers pull back on goods spending.

Furthermore, Chen also noted Temu would begin a, "new investment phase" aimed at upgrading the quality of merchants on its platform, while rooting out low-quality merchants and fraud. Of note, the U.S.

Consumer Product Safety Commission (CPSC) just launched an investigation into Temu, owned by PDD, and Shein, another Chinese competitor, over product safety this month. Perhaps management sensed this was coming, and will spend the money to better police its third-party sellers. In any case, the prospect of discounting to stave off competition in combination with higher spending sent shares down, which is somewhat understandable.

An incredibly cheap stock, typical of China After its August downturn, PDD Holdings trades at P/E ratio of just under 10. That is a ridiculously cheap multiple for a stock that just grew revenue 86%. In addition, PDD Holdings holds a lot of cash on its balance sheet to the tune of about $47 billion with little debt.

That stunningly accounts for over one-third of its market cap . Now, PDD's margins are quite likely to fall a fair amount from their current 33.5% mark.

Moreover, revenue should continue to slow from the 86% pace seen last quarter. Nevertheless, this is just a bout the cheapest stock one can find relative to its growth, even with the conservative projections, and even in a Chinese stock market full of extremely low-multiple stocks. While the economic and geopolitical risks to investing in China are obvious, for those willing to take the plunge, PDD Holdings should be at the top of your list.

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