3) PDD Holdings Inc. (NASDAQ:PDD)
Average Upside Potential: ~26.2%
Forward P/E as of February 28: ~11.2x
Number of Hedge Fund Holders: 85
PDD Holdings Inc. (NASDAQ:PDD), is a multinational commerce group, which is engaged in owning and operating a portfolio of businesses. The company’s economic moat stems from its network effect. Its continuing investments in its ecosystem, including merchant support and logistics enhancements, could yield significant long-term benefits. Its business model focuses on providing deals that are better when more people tend to participate.
PDD Holdings Inc. (NASDAQ:PDD)’s team purchase model tends to encourage users to invite others to indulge in group purchases to get lower prices. There will be a creation of a positive feedback loop—more buyers joining in will attract sellers, which in turn, increases the range of services and products available to users. Overall, as PDD Holdings Inc. (NASDAQ:PDD) continues to build the user base, attract more sellers and improve the user engagement, the network effect is expected to drive a growth cycle and value creation.
Also, improvements in logistics and fulfillment capabilities can result in faster delivery times and better customer satisfaction, fueling customer loyalty and repeat purchases. Through its investments in merchant support systems, PDD Holdings Inc. (NASDAQ:PDD) can attract and retain high-quality sellers, enhancing product offerings and improving the marketplace quality. Baron Funds, an investment management firm, released its Q3 2024 investor letter. Here is what the fund said:
“During the third quarter we re-initiated a small investment in PDD Holdings Inc. (NASDAQ:PDD). We believe the company is truly unique in the global e-commerce landscape, with an innovative business model, and very strong growth prospects. Founded in 2015 as Pinduoduo, the company has grown into China’s second-largest e-commerce player, capturing over 20% market share. PDD’s Consumer-to-Manufacturer (C2M) model, which connects manufacturers directly to consumers eliminated intermediaries, allowing for ultra-low prices that attract price-sensitive consumers and small merchants. Its discovery-based, algorithm-driven shopping experience has created a highly engaging platform, driving user and merchant growth in a virtuous cycle. We expect PDD to continue gaining share in China given its dominance in the value-for-money segment, growing branded product offerings at affordable prices, and high operational efficiency. PDD’s network effects and cost advantage, supported by its lean structure and efficient C2M model, are set to grow as it scales, both domestically and internationally. Its cross-border e-commerce platform, Temu, launched in September 2022, has rapidly become one of the world’s fastest-growing apps. Leveraging China’s excess capacity and PDD’s supply-chain efficiency, Temu wields strong pricing power over Chinese suppliers and attracts overseas consumers with competitively priced products. While still in early stage, Temu has achieved 2% of the global ex-China e-commerce market and a variable breakeven in the U.S. market, underscoring PDD’s focus on sustainable growth. Despite its rapid growth and profitability, PDD trades at a double-digit free cash flow yield (despite losses from the early-stage international expansion through Temu), significantly below sector peers. While concerns over geopolitical tensions exist, we believe PDD’s growing competitive edge, strong cash flow, and disciplined management position it to create substantial long-term value for shareholders.”
