1. PDD Holdings Inc. (NASDAQ:PDD)
Forward PE ratio as of September 11: 6.56
Average Analyst Price Target Upside Potential: 79%
Number of Hedge Fund Holders: 86
According to analysts, PDD Holdings Inc. (NASDAQ:PDD) is one of the top undervalued cyclical stocks to buy to diversify an investment portfolio into the internet retail space. Domiciled in Dublin, Ireland, it operates as a multinational commerce group offering consumer products in various categories, including agricultural produce, apparel, food and beverage, electronic appliances, furniture, and household goods.
The company’s competitive edge stems from carrying most of its business in China and, therefore, exposure to a massive marketplace. Its discount marketplace has carved a niche targeting shoppers in lower-tier cities.
PDD Holdings Inc. (NASDAQ:PDD) also took advantage of its early surge in growth to introduce an online platform focused on agriculture, bridging the gap between farmers and consumers directly. This direct-to-consumer model allows PDD to offer fresh produce at significantly reduced prices compared to conventional supermarkets. Additionally, this move has established PDD as a key player in the agricultural sector, a notable position that Alibaba and J.D. were missing.
Between 2018 and 2023, PDD experienced an impressive compound annual growth rate (CAGR) of 80%. In contrast, Alibaba’s growth rate was a more modest 20% from fiscal 2019 to fiscal. The company is projected to register market share growth between 2023 and 2026 in China, and it should see its revenue grow at a compound annual growth rate of 38%. Likewise, its net income is expected to grow at a CAGR of 47%, which should allow it to generate more shareholder value.
In its second quarter of 2024, PDD Holdings Inc. (NASDAQ:PDD) delivered an 86% year-over-year revenue increase to RMB 97 billion as it successfully shrugged off stiff competition and global uncertainties. Adjusted operating net income was up 139% to $4.48 billion, leading to adjusted earnings per share of $3.20, up from $1.45
The stock is trading at 6 times its forward earnings, a dirt cheap multiple for investors eyeing exposure in the Chinese e-commerce landscape.
According to Insider Monkey’s second quarter 2024 database, 86 hedge funds included PDD Holdings Inc. (NASDAQ:PDD) in their portfolios.
On the other hand, analysts on Wall Street rate the stock as a Buy with an average price target of $166.58, implying a 79% upside potential from current levels.
Here is what Baron Funds, an investment management company, said about PDD Holdings Inc. (NASDAQ:PDD) in its fourth quarter 2023 investor letter:
“We added to our digitization theme by building a position in PDD Holdings Inc. (NASDAQ:PDD), a leading Chinese e-commerce platform. Founded in 2015, the company has emerged as China’s second largest e-commerce player, capturing approximately 20% market share. In our view, PDD’s competitive moat lies in its team purchase model that facilitates bulk buying through direct partnerships with manufacturers, thereby eliminating intermediaries (e.g., distributors and middlemen) and lowering costs. Key factors driving the company’s meteoric growth include rising consumer demand for affordable products in China amid an economic slowdown, small-scale merchants seeking alternatives to Alibaba, and superior management execution. PDD’s revenue growth outpaces gross merchandize value growth owing to rising take rates as merchants aggressively compete for consumer traffic on the platform. In our view, PDD should continue to gain market share given its dominance in the value-for-money segment, growing affordable branded product offerings, and high operational efficiency. We believe the company’s growth will be further supported by the recent launch of its international e-commerce platform, Temu, which has become one of the fastest growing apps globally. Leveraging China’s excess manufacturing capacity, Temu has strong negotiating power with domestic suppliers and attracts global consumers with competitively priced products. Temu’s recent initiatives to improve unit economics, coupled with achieving variable breakeven in the sizable U.S. market, showcase management’s skill and commitment to sustained growth. We expect PDD to at least double its earnings and free cash flow in the next three years, with the potential for continued compounding thereafter.”
The best undervalued cyclical stocks to buy, according to analysts, are companies poised to benefit and generate significant value as economic conditions improve on lower interest rates. However, given that the artificial intelligence arms race is just but starting, there are under-the-radar AI stocks trading at highly discounted valuations that hold greater promise for anyone looking to diversify their portfolio. If you are looking for an AI stock that is more promising than the top activist investment plays, check out our report about the cheapest AI stock.
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