Watch for a dip buying opportunity in PDD Holdings Inc. (NASDAQ: PDD) as China’s economy blows past expectations this quarter. Analysts may see their hands forced to boost their current price targets when they compare PDD and peers like Alibaba Group (NYSE: BABA) and JD.com Inc. (NASDAQ: JD).
Investors across the board are steering away from Chinese stocks as the nation has become ‘uninvestable.’ However, some recognize that in an uncertain interest rate cycle in the U.S., not all Chinese stocks are made equal. The Federal Reserve (the Fed) hinted at cutting interest rates up to four times this year; The Goldman Sachs Group Inc. (NYSE: GS) now thinks it could only be three.
The FedWatch tool at the CME Group Inc. (NASDAQ: CME) points to traders pricing in these cuts by May or June this year, meaning that a U.S. stock market tantrum could be in the works. Mega investors like Ray Dalio and Michael Burry (the guy who called the 2008 financial crisis) are now comfortably trickling into the Chinese stock market.
PDD Carries the Tailwind
As of March 2024, the Chinese economy reported hotter-than-expected inflation rates: 0.7% versus an expected 0.4%. While nothing major, this does show the world that the nation may be cooking up a comeback in the coming months if this is to become a trend.
Naturally, the consumer discretionary stocks in the nation start to make their way to the top of the watchlist for some of these big investors. While Dalio and Burry need to deal in the millions due to their sizeable funds, you can look into smaller companies (which carry much more upside) like PDD.
Now that the Chinese government is implementing stimulus measures to rescue its economy and stock market, you can count on a potential consumer demand wave for these stocks. But don’t just take the economic theory for it; here is how PDD stands against peers.
Markets See Double-Digit Upside
While the consensus price target on PDD is $131.3 a share, meaning only a 5% upside from today’s prices, other analysts see the writing on the wall. Those at Benchmark and Jefferies Financial Group Inc. (NYSE: JEF) see a price target of $215 and $157 a share.
Analysts at these two rating houses are in sync with the market's expectations, calling for a 70% and 24% upside for the stock. But these analysts aren't alone in their bullish view of PDD; some institutions also buy in.
The Vanguard Group, as of March 2024, reportedly increased its position in PDD stock by 0.3%. This may not seem like a lot, but that small percentage represents a transaction of $10.6 million. The American International Group Inc. (NYSE: AIG) also upped its stake in the company by 4%, or roughly $311,000.
Head and Shoulders Above Peers
Because their last quarterly earnings report showed a revenue increase of nearly 100%. These figures happened during a time when the Chinese economy was considered to be frozen, more participants believe that the coming quarterly results will be even better than the last one.
There are ways for you to gauge what the market is thinking and how it perceives the potential for this stock to move on the coming release. First of all, the earnings per share (EPS) growth rate will likely command a stock's valuation, so the better the projections for EPS, the higher the stock should be valued.
In the case of PDD, analysts believe that EPS can grow by as much as 26% in the next 12 months. This rate is head and shoulders above JD.com’s 13% and Alibaba’s decline of 3.4%. Because of this industry-leading growth, markets are willing to pay a higher premium for the stock.
Trading at a forward price-to-earnings ratio (forward P/E) of 14.3x places PDD stock at a 77% premium to JD.com and its 8.1x valuation. Likewise, because Alibaba trades at a forward P/E of 8.3x, PDD commands a premium of 72% above China’s most recognized E-commerce company.
More than that, price action is on your side; PDD stock trades at 83% of its 52-week high. This price level compares to JD.com’s 61% and Alibaba’s 70%, thrown into a bear market per Wall Street’s definition (20% decline or more from recent highs).
