PDD Holdings Earnings Volatility Alerts Buyers

Key Points

• PDD stock has changed a little, even after tripling its net income for shareholders. The company keeps riding on the Chinese economy's tailwind from a consumer comeback.
• Analysts still see double-digit EPS growth for the rest of the year despite management's lack of guidance for 2024.
• Price targets suggest a potential 50% rally from here, and smart money has bought into that idea.

After a spectacular 36.4% run in the fourth quarter of 2023 earnings, shares of PDD Holdings Inc. NASDAQ: PDD have changed a little as the company released its first quarter 2024 results. However, investors can lean on the run-up to the announcement for a sentiment check, which delivered a 43.5% rally as markets geared up for a solid start to the year. 

Some may have gotten scared during the pre-market hours following the announcement, as the stock plummeted by nearly 15%. However, as some of Wall Street’s trading desks say, “the first move is always wrong,” as willing buyers came flooding in with orders at those seemingly cheap levels, rescuing the stock and pushing it to trade at a 2% advance throughout the day. 

That’s a big piece of evidence investors can take home if they still consider China a relatively safe place to invest their capital during this cycle. As PDD belongs to the consumer discretionary sector, arguably one of the first sectors to rally on an overall market recovery, the quarter’s financial results and price actions show a more profound trend at play.

China’s Stock Market: Land of The Cheap

At least, that’s what Wall Street legend Ray Dalio thought. The multi-billion hedge fund manager saw it fit plow into Chinese stocks through the iShares MSCI China ETF NASDAQ: MCHI as early as the third quarter of 2023. Knowing that Dalio is a macro investor looking for relatively undervalued investments, here’s his logic.

China’s stock market recently fell to near-decade lows, and the average yield on equities rose to nearly 5.5%. Things get interesting when investors compare this yield to the Chinese 10-year bond yield, which hovers around 2.3% today.

Whenever stocks offer a higher yield than the so-called ‘risk-free’ rate from government securities, it typically flashes a strong buy signal for those with the stomach to get in. The same thing happened in 2020 for the U.S. market, when bonds dropped to below 1% while the S&P 500 paid a yield of nearly 2.5%.

What followed was a 115% rally for the index over the next 12 months, a run-up to remember for those who were brave enough to buy during the COVID-19 pandemic. 

Taking another angle into individual stocks, Scion Capital’s Michael Burry (yes, the guy who called the 2008 financial crisis) just made Alibaba Group NYSE: BABA and JD.com Inc. NASDAQ: JD his biggest portfolio holdings today. 

A direct competitor to Burry’s top holdings, PDD offers investors twice the growth and momentum to take advantage of the potential recovery in the Chinese stock market.

PDD Starting 2024, Just Right

That’s the pride behind the company’s press release, where management led the announcement with 131% revenue growth over the year, bringing the total to a staggering $12 billion. 

The juice came from the benefits of achieving economies of scale for PDD, as operating profits soared 275% over the year, outpacing revenue due to increased efficiency within the business. Likewise, net income rose by 246% over the year, which should have been enough to send the stock flying. 

However, as geopolitical risks are on the list of potential risks for those looking to invest in Chinese stocks, PDD’s price action seemed a bit contained compared to its financials; perhaps the potential growth had already been priced in after the near 50% rally before the announcement came out.

Though management provided no guidance or outlooks for the rest of the year, investors can lean on other economic trends to develop their assumptions. One is the Chinese inflation rate, which has been rising for the past quarter to show increasing consumer demand.

More than that, Wall Street analysts still think that PDD's earnings per share (EPS) could rise by 26.1% over the next 12 months. These projections could be based on the Chinese consumer's attempt to return, a thought also reflected in analyst price targets.

Those at J.P. Morgan Chase were bold enough to slap a $190 valuation for PDD, daring the stock to rally by nearly 30% from where it trades today despite the near 50% recent rally. 

Benchmark analysts were even bolder in their $220 valuation today. To prove this right, the stock would need to rally by another 50% from today’s prices. 

So-called smart money is also looking to increase its stakes in PDD’s future, as the Vanguard Group raised its stake in the stock by 0.4% in the past quarter to bring its net investment up to $2.8 billion as a vote of confidence.