PDD Holdings Inc. (PDD): One of the Best Undervalued Stock According to Wall Street Analysts?

We recently compiled a list of the 10 Best Undervalued Stocks To Buy Now. In this article, we are going to take a look at where PDD Holdings Inc. (NASDAQ:PDD) stands against the other undervalued stocks.

Demographic Shifts and AI Innovation: A Bullish Case For the US Market

In the prior couple of years, experts and analysts were worried about a recession in the US and their best-case scenario was a soft landing. Experts are still predicting the latter. However, 2024 has proven to be quite a healthy year for the US stock market as it recently hit new highs on the back of technology stocks. Moreover, we also saw notable market broadening in the latest earnings season. However, Co-Founder and Head of Research at Fundstrat Global Advisors, Tom Lee is not just bullish on the current year but also sees the US stock market almost tripling by the end of the decade.

On June 26, Lee told CNBC that he believes the S&P 500 could reach 15,000, driven by a combination of demographic trends and technological advancements. He compared today's market to past periods of rapid growth, such as the 1920s and the 1950s-1960s. He credits the potential surge to an increase in the population of prime-age adults (30 to 50 years old), which is now led by Millennials and Gen Z. As these generations enter their peak earning years, their borrowing and spending are set to increase, and they are going to take major life decisions which are expected to drive economic growth.

In addition to these demographic factors, Lee highlights the transformative impact of artificial intelligence (AI) on the economy. He believes that AI presents a significant opportunity for US technology companies, especially as it addresses a global labor shortage by converting labor costs into technological solutions, which would probably boost the US tech sector revenues. Furthermore, the US, with its leading technology sector, is well-positioned to attract substantial global investment, especially as we see that other regions like China and Germany face demographic and economic challenges.

Despite Tom Lee’s optimism, he acknowledged several risks to his bullish outlook. He said that a global recession could undermine growth, and the development of AI could also backfire or cause geopolitical instability. Additionally, there is the potential for the stock market to peak prematurely, forming a bubble.

Despite the risks, Tom Lee predicts an optimistic outlook for the US market in the current decade. Based on his insights, this could be an ideal time to invest in the market for the longer term. Keeping in mind that Lee predicts good things for the future of AI, you can take a look at the 10 Best Artificial Intelligence Stocks to Buy Under $10.

Our Methodology

For this article, we identified over 40 stocks that were considered undervalued by other financial media websites. From that list, we narrowed our choices to 10 stocks whose forward PE ratio was either equal to or below 15 or was below their industry average, as of June 24. We listed the stocks according to their hedge fund sentiment, which was taken from our database of 920 elite hedge funds as of Q1 of 2024.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A close-up of a customer using the company's e-commerce platform whilst shopping online.

PDD Holdings Inc. (NASDAQ:PDD)

Forward PE as of June 24: 11.6

Number of Hedge Fund Holders: 76

PDD Holdings Inc. (NASDAQ:PDD) is a global commerce group with a diverse portfolio of businesses. Two of its main ventures are Pinduoduo and Temu. Pinduoduo is an e-commerce platform that offers a number of products, including agricultural produce, apparel, shoes, bags, food and beverages, electronic appliances, and furniture along with many other products. Temu is an online marketplace that offers heavily discounted consumer goods.

PDD Holdings Inc. is making significant investments to enhance its global business. The company is improving supply chain efficiency by rolling out tailored fulfillment solutions in different markets and welcoming quality merchants worldwide. It is also investing in legal and compliance capabilities to create a safe and trustworthy shopping environment and conducting forward-looking research into laws and regulations in its operating markets.

Additionally, PDD Holdings Inc. (NASDAQ:PDD) is investing in technology and operations to improve overall user experience, which allows it to cater to the diverse needs and quality standards of global users. These investments are expected to bring more value to consumers and merchants, which will increase the platform's recognition and acceptance in local communities.

PDD is one of the best undervalued stocks to buy as analysts expect a year-over-year EPS growth of 84%. The company is trading at a forward price-to-earnings ratio of 11.6x, nearly at a 25% discount to its sector median, and Wall Street analysts imply a 43% upside to PDD stock at current levels on June 24.

As of March 31, 76 hedge funds had stakes worth $5.8 billion in PDD Holdings Inc. (NASDAQ:PDD). Hillhouse Capital Management is the company’s largest shareholder with 11.8 million shares worth $1.37 billion.

Baron Emerging Markets Fund stated the following regarding 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.”

Overall PDD ranks 3rd on our list of the best undervalued stocks to buy. You can visit 10 Best Undervalued Stocks To Buy Now to see the other undervalued stocks that are on hedge funds’ radar. While we acknowledge the potential of PDD as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PDD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

 

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Disclosure: None. This article is originally published at Insider Monkey.