Shares of Chinese e-commerce platform operator Pinduoduo (PDD) have fallen over the past year due to a Chinese regulatory crackdown, which has fueled investor pessimism. Although the stock has been gaining momentum lately, a new SEC rule could result in the company being delisted from NASDAQ. So, is it wise to invest in the stock now? Read on for our take.
Shanghai, China-e-commerce platform operator Pinduoduo Inc. (PDD) operates a mobile platform that offers value-for-money products and interactive shopping options. Shares of PDD have fallen 61.8% 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 faced investor pessimism due to Chinese regulatory crackdown on the country’s Internet giants. Regulators have introduced a series of laws. And GFM Asset Management’s Tariq Dennison expects the crackdown to last “at least another 20 or 30 years”.
In addition, the deterioration of Sino-US relations adds to investors’ concerns. The US government has moved towards delisting of Chinese companies from US stock exchanges for non-compliance with Washington disclosure requirements, with the SEC requiring foreign companies to open their books for US scrutiny. Shares of PDD fell 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 Societe Generale analysts said, “We believe the worst of the tech regulatory storm is behind us, although the regulatory upgrade is not yet complete and will have a lasting impact on the long-term growth prospects of the tech sector.”
Here’s what could shape PDD’s performance in the short term:
Missed quarterly revenue expectations
PDD’s total revenue rose 51% year-on-year to RMB21.51 billion ($3.34 billion), missing Street’s revenue estimate by 16.6%. Its average monthly active users grew 15% from the same period last year to 741.50 million. Its operating profit was RMB 2.14 billion ($332.01 million), up sharply from its loss a year earlier. And its non-GAAP net income attributable to common shareholders was RMB 3.15 billion ($488.90 million), up from RMB 466.40 million in the year-ago quarter. The company’s non-GAAP revenue per ADS was RMB2.18 ($0.34), indicating a 560.6% year-on-year increase.
However, its average monthly active user growth slowed as the pandemic-fueled online shopping boom waned, with customers returning to in-person shopping. Additionally, the COVID-19 outbreaks in China have caused consumers to become more careful in their spending. General Manager Chen Lei said the company will focus more on research and development, abandoning its earlier strategy of emphasizing sales and marketing.
In terms of forward P/E, PDD is currently trading at 250.14x, 1,525.3% higher than the industry average of 15.39x. Additionally, its EV to Forwards ratio of 4.14 is 215.6% higher than the industry average of 1.31. PDD 5.23x and 7.64x respectively forward Price/Sales and Price/Book are 362.6% and 150.9% above industry averages.
POWR ratings reflect uncertainty
PDD has an overall C rating, which equates to Neutral in our own POWR Rankings system. POWR ratings are calculated by considering 118 separate factors, with each factor weighted to an optimal degree.
PDD has a C rating for Momentum. The stock’s lackluster momentum over the past few months justifies this rating.
The stock has a D rating for value, which is consistent with its stretched valuation.
Among 50 F-listed stocks China industry, PDD is ranked #15.
Beyond what we’ve listed above, check out PDD Ratings for Growth, Stability, Sentiment, and Quality here.
See the highest rated stocks in Chinese industry here.
PDD is one of the fastest growing e-commerce companies in China. However, China’s tightening regulatory policies could impact its growth trajectory. Additionally, the stock could face delisting from the NASDAQ stock exchange if the company fails to comply with a new SEC rule. Thus, we think it might be wise to wait for clarity on the company’s short-term outlook before investing in the stock.
How does Pinduoduo Inc. (PDD) compare to its peers?
Although PDD has a C rating in our proprietary rating system, one might 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.
Shares of PDD rose $4.34 (+6.74%) in premarket trading on Thursday. Year-to-date, the PDD has gained 17.29%, compared to a -4.42% rise in the benchmark S&P 500 over 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 in equity research and portfolio management at Finlatics.
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