Summary
PDD Holdings (Nasdaq: PDD) is one of the world’s largest e-commerce companies, operating Pinduoduo in China and Temu internationally. In just a decade, it has reshaped online retailing through its group buying model and C2M strategy. Despite its consistent profitability and strong positioning in China, where it generates all of its profits, the stock has seen a sharp decline following Trump’s reciprocal tariff announcement. Fears of a potential ADR delisting have resurfaced, overshadowing the company’s fundamentals and presenting yet another opportunity to acquire a dominant Chinese retailer at a deeply discounted valuation.
Investment Thesis
We assign PDD a strong buy rating. Since breaking above $90 in 2023, the stock has followed a remarkably consistent pattern, bottoming near $90 and rallying to around $160 (~70% upside each time). This cycle has already played out three times in the last two years and appears to be repeating once again: after hitting a low of $87 on April 4, shares have already rebounded to $110 as of May 2. Our strategy is straightforward, buy around $90, sell around $160 (or hold longer term depending on the future situation). While this report comes a bit late as the price was more attractive last month, the thesis is still in play and PDD offers a lot of value at current levels.
This specific pattern is able to play out as we’re talking about one of the fastest-growing e-commerce companies in the world, with a unique business model and exposure to a resilient domestic market. Even before the reciprocal tariff announcement, Chinese stocks like PDD were increasingly seen as a hedge or safe haven. While Temu’s US expansion is now into question, and rightfully so, and that could affect long-term valuations, the current, almost absurdly low price is mostly driven by delisting fears. If geopolitical tensions ease even slightly, those fears may quickly fade.
Part I: Business Model
We believe that PDD has been able to hold support around $90 and continue its upward trend because the fundamentals of the business are undeniably strong. In just a decade, Pinduoduo went from zero to becoming the second largest e-commerce platform in China, now holding around 19% of the market with a GMV of roughly $655 billion. This growth has been driven by its innovative business model, which rests on its group buying model and consumer-to-manufacturer (C2M) strategy.
The group buying model is a great idea that allows users of the platform to team up to buy products in bulk at ultra-low prices. This doesn’t just appeal to consumers looking for cheap products, but it also works great as advertising, since users themselves attract others to the platform. Then, there’s the C2M strategy, which cuts out the middlemen. By working directly with factories and farmers, Pinduoduo slashes costs and passes the savings on to consumers, proving that many people are perfectly happy with unbranded products, which is particularly true for everyday items like household goods and fresh produce, where branding matters far less than price and quality.
Part II: Resilience to Tariffs
With baseline tariffs on Chinese imports of 145% and the end of the de minimis exemption, Temu’s expansion into the American market is being halted. The US represents the bulk of Temu’s sales, and the market is now pricing in the risk that tariffs are held in place for a long time. While Temu has been important for PDD’s growth narrative, it currently accounts for only a single-digit percentage of the company’s overall sales, and it still operates at a loss, as it’s in the early stages of expansion.
There’s an entire bull case for PDD based on Temu, but we believe that while justified to a certain extent, the valuation decline is overstated. For one, it likely assumes that tariffs will be in place for the long term, which may not be the case. Also, the company’s core earnings engine, domestic Chinese retail, remains fully intact. For comparison, over 70% of products sold by Amazon sellers are manufactured in China, and about half of its top sellers are China-based. In this sense, PDD enters this period in a structurally stronger position than Amazon, yet its valuation doesn’t reflect that resilience.
Part III: Delisting Risk
Considering the strength of the company, the main reason behind PDD’s cheap valuation is the fear of a potential ADR delisting. In theory, this could happen if the trade war escalates dramatically. In practice, though, that seems very unlikely. Trump himself has said he wants to reach a deal, and we may already be nearing the beginning of tariff talks. We don’t expect China and the US to suddenly become best friends and drop all tariffs, though that would obviously be great for PDD, but even a small concession would mean de-escalation, and the probability of a delisting scenario would fall significantly.
Then there’s the logic behind the strategy itself. What would Trump actually gain from forcing a delisting? Most investors in ADRs are American or international, not Chinese, so it would primarily hurt US investors. It would also hit the companies, of course, but Xi Jinping doesn’t seem to care about the ADRs’ stock prices, as was made more than clear during the 2020 tech crackdown, when Chinese stocks lost over a trillion dollars in market value. If anything, delisting would strengthen the mainland and Hong Kong markets over the long term. It’s up to each investor to decide whether they’re willing to take on that risk, but we’ve seen this play out before, and in 2022 Chinese stocks rallied fearlessly once the panic faded.
Fundamentals and Valuation
Over the last five years (2020 – 2024) revenue has grown from $9,177 million to $53,955 million (a CAGR of 55.72%), and since becoming profitable in 2021, net profit has surged from $1,219 million to $15,403 million (a CAGR of 132.92%). Over the same period, cash flow from operating activities increased from $4,516 million to $16,704 million (a CAGR of 54.65%). These growth rates position the company as one of the fastest-growing e-commerce companies globally, well above international peers like Amazon (which trades at a P/E ratio of 32.20x), and even outpacing MercadoLibre in some key metrics (which trades at a P/E ratio of 61.04x). Of course, these companies have other business segments like cloud and financials, but the comparison applies for the core e-commerce segment.
Moreover, PDD has a very strong balance sheet, with a current ratio of 2.20 and more cash on hand than total liabilities. Despite all this, the company trades at a P/E ratio of just 10.42x, well below its 10-year average of 21.58x. This suggests a potential upside of 107% if it were to trade in line with its 10-year average. Historically, PDD tends to trade at the lower end of its valuation range during periods of heightened geopolitical tension, such as now, near its 52-week low, but often reverts once the dust settles. Notably, if PDD were to be valued in line with international peers the upside could be even greater.
Conclusion
The risk of delisting is real, we don’t know what will happen, and owning Chinese ADRs is clearly not as safe as owning US stocks. But, as Porter Collins, Portfolio Manager at Seawolf Capital said just 3 months ago, referring to Chinese equities: “The question there is: what can go right? What happens if Trump comes out and says we have a trade deal with China? What happens if it comes out that China is now the AI leader?” This is exactly the point. Little has to go right. The stock is priced for disaster, yet the fundamentals are intact, and we already see a clear recovery pattern in play. It’s an asymmetric bet, with limited downside at these depressed levels, and massive upside if tensions ease even slightly and sentiment turns.
Disclaimer: This report represents our opinion and is not financial advice.