Why Is Ray Dalio Bullish on PDD Holdings Inc. (PDD) Now?

We recently compiled a list of Ray Dalio’s Top 10 Growth Stock Picks with 30+% Revenue Growth. In this article, we are going to take a look at where PDD Holdings Inc. (NASDAQ:PDD) stands against the other stocks with 30+% revenue growth.

Valuing a stock comes in several shapes and flavors. The most common of these is the price to earnings ratio. Not only is this ratio used to evaluate the premium that investors are paying for a firm right now, but it is also used in tandem with forecast earnings to wager a guess at the future share price. This allows investors to position their portfolio with respect to the market and invest in those stocks that they believe can rise in the future.

However, a stock's earnings aren't the only income statement item used in stock valuation. Two other popular approaches are the price to sales or P/S ratio and its peer Enterprise Value to Revenue or EV/Revenue ratio. Both of these look at a firm's top line performance, and the latter is typically used to value those firms that are in high growth sectors that are ripe for acquisitions.

Among these two ratios, the P/S ratio was popularized by the billionaire Ken Fisher. One of the richest people in the world, Fisher has a net worth of $11.2 billion. He shared his approach to using revenue growth in an article for the American Association of Individual Investors (AAII) in 1984. Fisher shared that the P/S ratio could help investors "ratios measure the popularity of the stock." This, according to him, was key since it enabled them to sift out those stocks with low P/S ratios as these carried the highest chances of gaining value in the future in case of positive developments. Fisher added that while the P/E ratio was also a measure of popularity, it was too "elastic" and dependent on the various accounting assumptions used to arrive at net income.

A P/S ratio, on the other hand, removed the effects of these "accounting assumptions," shared Fisher. To back his claims, he outlined that the stocks in the lower quartile (25%) of P/S ratios delivered 64.57% and 56.11% in returns for the bottom seven and nine stocks, respectively which far outstripped the 28.67% in returns of the nine lowest P/E stocks.

However, this piece is about Ray Dalio and not Ken Fisher. Like Fisher, Dalio is also one of the richest people in the world. As of July 2024, Forbes Magazine estimates his net worth to sit at $15.4 billion. Dalio's hedge fund Bridgewater Associates' had listed $19.7 billion worth of investment positions through its SEC filings for 2024's first quarter. These investments follow his approach of taking a broader look at the global economy and geopolitical environment and seeing which stocks can benefit.

Talking about returns, the past couple of years have been tough for Dalio's firm. While he is neither Bridgewater's CEO nor CIO right now, his philosophy is responsible for having set up most of Bridgewater's most well known products like its Pure Alpha fund. Bridgewater's Pure Alpha has struggled over the past four years. It has lost 4% during this time period, in an environment where global bonds and the economy have struggled due to high inflation and interest rates.

At the same time, even though Bridgewater has struggled during recent economic crises, it has managed to hold its ground during several crises of the past. For instance, in 2008, the firm delivered 8.7% in gains at a time when the S&P 500 tumbled by 38.5%. It's times like these that show the true mettle of a hedge fund boss, and during 2018, Bridgewater delivered 14.6% in returns which were in sharp contrast to the hedge fund industry's average 6.7% in losses. As for the Pure Alpha 11 fund, it has delivered 11.4% in returns between 1991 and 2022. Finally, 2024 seems to be a breath of fresh air for Dalio's firm too since during Q1 it posted a strong 16% in returns which were 11 percentage points higher than the hedge fund industry's average 4.59% in returns.

Coming back to revenue growth, while Fisher's central point when favoring P/S over P/E is the undue effect of accounting on earnings and by extension on the share price, is it possible that revenue surprises also drive stock prices? If they do, then the merit of using P/S, and particularly lower P/S stocks as an investment, increases and becomes more important. On this front, research from Emory University and the Stern Business School analyzed income statements, balance sheets, and returns data between 1987 and 2003, to check if there's any relation between revenue surprises and stock returns around earnings announcements.

It revealed that "earnings surprises that are accompanied by revenue surprises signal more persistent earnings growth than similar levels of earnings surprises not accompanied by matching revenues surprises." In numerical terms, the research concluded that revenue surprises provide another valuable signal to investors since when stocks were screened for revenue and earnings surprises, the difference between abnormal returns in this category was 8.41% which was nearly two percentage points higher than the difference for stocks screened only for earnings surprises.

So, as it appears that revenue is an equally important part of stock valuation, we decided to look at Ray Dalio's top revenue growth stocks.

Our Methodology

To make our list of Ray Dalio's top growth stocks with 30%+ revenue growth, we first filtered the 230 largest positions of Bridgewater Associates by investment value to pick out only those stocks with an absolute revenue growth greater than 80% for the past three years. Then, these stocks were further filtered with their 1-year revenue growth, and those with a growth higher than 30% were selected. These stocks are ranked by the value of the firm's stake in them during Q1 2024.

We also mentioned the number of hedge funds that had bought these stocks during the same filing period. Why are we interested in the stocks that hedge funds pile into? 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)

Number of Hedge Fund Investors  in Q1 2024: 76

1 Yr Revenue Growth: 90%

Bridgewater Associates’ Q1 2024 Stake: $179 million

PDD Holdings Inc. (NASDAQ:PDD) is a Chinese eCommerce company that has managed to establish itself as a formidable player in an industry dominated by the eCommerce giant Alibaba. This is because of its bulk buying model, which enables buyers to team up, increasing their buying power, and getting lower prices for their products. This model has also made PDD Holdings Inc. (NASDAQ:PDD) one of the fastest growing companies in China, and that too in the cyclical eCommerce industry which typically suffers in a slow economy. Additionally, PDD Holdings Inc. (NASDAQ:PDD) is also using its Chinese success to position itself for the global market through its Temu platform. Through Temu, it hopes to use its established partners with Chinese merchants to deliver low cost products to the Western market. However, Temu has suffered from consumer complaints, and the EU consumer protection group has lodged a complaint against it which alleges that Temu has failed to protect customers. Additionally, PDD Holdings Inc. (NASDAQ:PDD) could also face headwinds through Western sanctions against China and data collection concerns.

On quality complaints, here's what PDD Holdings Inc. (NASDAQ:PDD)'s management had to say during the Q1 2024 earnings call:

"As commerce integrates with digital technology at a record pace, consumers and regulators are holding e-commerce platforms accountable for higher standards and we are taking the initiative to build an industry-leading compliance program and to leverage our technology capabilities to empower SME businesses with our compliance know-how. This is to foster a healthy environment that attracts quality merchants that are willing to play by the rules and drive out bad actors thereby creating a positive feedback loop. When it comes to consumer well-being and economic interest, we always stand behind the former. We are focused on building long-lasting trust with our consumers and not on short-term gains. We also adopt a similar long-term orientation in other aspects of our business."

Overall PDD ranks 2nd on our list of the stocks with 30+% revenue growth. You can visit Ray Dalio’s Top 10 Growth Stock Picks with 30+% Revenue Growth to see the other growth stocks that are on hedge funds’ radar. While we acknowledge the potential of PDD as an investment, our conviction lies in the belief that some 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.