The recent selloff we’ve seen in Chinese stocks appears to be creating some interesting opportunities for investors. Indeed, there’s an argument that can be made that investors in Pinduoduo Inc. (NASDAQ:PDD) and PDD stock could really have a winner on their hands.
If growth is everything (and that still seems to be the case these days), then PDD stock is one to consider. This is a company that leverages growth in a couple of key secular trends. Namely, Pinduoduo’s focus on social commerce and healthy eating are driving forces in investing in companies in this sector.
Pinduoduo is “one of the largest e-commerce platforms for agricultural goods in China.”
This company has produced incredible growth in the past, and continues to do so today. I’m going to dive into this growth more in this article. However, investors seeking emerging markets growth may not have heard of PDD stock. After all, there are some pretty great growth plays in the e-commerce space domestically.
Given the fact this is a Chinese play, there’s understandably some concern with owning PDD stock right now. Deteriorating U.S.-China relations, and a regulatory backdrop that’s not so friendly to U.S.-listed Chinese stocks is at play with the recent selloff we’ve seen in this sector. However, I think Pinduoduo is an intriguing pick among Chinese growth stocks today.
Let’s take a fundamentals-focused approach in analyzing why this stock looks like a strong buy.
The Growth PDD Stock Provides Is Worth a Look
With rising bond yields, a rotation away from value into growth is underway. Growth used to be everything, and maybe that’s “so 2020” to think that way.
However, interest rates are still near historic lows. Grabbing high-quality growth stocks at reasonable prices is becoming more and more difficult.
On most fundamental growth metrics, I rate PDD stock an A. The company’s year-over-year revenue growth of 97% is great. The fact that Pinduoduo has doubled its revenue is perhaps less exciting than the fact that this is actually a decline from its previous results. Business is a-booming for Pinduoduo right now.
Of course, a significant portion of this growth can be attributed to the pandemic. We’re all cooped up at home, browsing the internet, and looking for ways to spend money. That’s true. However, on a forward-looking basis, the company projects 70% revenue growth. That’s pretty darn good, particularly in the context of a global economic reopening which is expected late-2021, or early-2022. China may actually be ahead of the curve in this regard, so these projections are bullish right now.
The company has also grown its operating cash flows by a staggering 90% year-over-year. The fact that operating cash flow growth has kept up with revenue growth is a bullish fundamental signal. Over the next year, the company expects this growth to slow, though that’s understandable.
A surge of more than 140% in working capital for PDD stock is also encouraging. The company is building up a war chest it can use for future growth prospects. That’s a good thing for long-term growth investors looking at this stock.
This Growth Isn’t Cheap
Yes, Pinduoduo is an expensive stock. Indeed, investors concerned about the valuations in today’s market have reason for pause with this name.
However, the company’s aforementioned growth prospects are hard to come by today. For those who believe “you get what you pay for,” it appears PDD stock is among the higher-quality names to consider among its peers.
That said, it’s a stock that’s trading around 19-times trailing EV/sales and 11-times forward EV/sales. Its forward price/cash flow metric is high at 35-times sales, and it’s up there with the more expensive growth stocks today.
Additionally, it appears operating leverage is another concern with this stock. Given the amount of revenue growth Pinduoduo has produced, one would expect to see the company’s EPS loss deteriorate over a given period. Such is not the case with Pinduoduo. The company’s EPS loss grew to -$0.92 from -$0.87 a year prior.
So, this is another story of a growth stock that’s losing money. No biggie — there are hundreds of such companies out there right now. However, investors may be demanding more profitable growth moving forward. Accordingly, investors will likely be paying more attention to bottom line beats in the coming quarters.
Growth at any cost isn’t a strategy that will win over the long-term. However, right now, Pinduoduo is seeking to capture as much market share as possible. Investors buying into this name are making a bet that the company’s management team can reach the profitability targets investors have set over time. Accordingly, there’s a degree of uncertainty with this stock that seems to be anchoring shares lower in recent months.
Pinduoduo is an intriguing stock, and one I hadn’t looked at in some time.
Again, this is a growth stock with a ton of potential. However, from a bottom line standpoint, I can understand why investors may be hesitant right now. With a rather unpleasant backdrop for Chinese stocks today, there could be more in the way of near-term headwinds on the horizon.
However, this could also mean right now is the best time to buy this stock. Buying low and selling high will never go out of style. PDD stock appears to provide relatively decent value in the overvalued market in which we find ourselves today.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.