Pinduoduo: Is Chinese Tech Stock Poised for Surge?

© Reuters. Pinduoduo: Is Chinese Tech Stock Poised for Surge?

Investors have been avoiding Chinese tech stocks like the plague lately.

This sentiment is understandable, considering the extent to which the Chinese tech sector has been beaten down lately due to a series of regulatory curbs from the CCP. However, Pinduoduo Inc. (NASDAQ:PDD) is one tech giant that has not yet been explicitly affected by government-induced headwinds.

Accordingly, this has been one of the "best-performing" Chinese tech stocks, if there is such a thing right now. Pinduoduo is an agriculture-based technology platform, that focuses on connecting farmers and distributors directly with consumers.

This company's platform is seen as providing a social good to lower-income Chinese. Accordingly, this is a company that looks to perhaps escape scrutiny by regulators.

While not out of the woods yet, the market seems upbeat on Pinduoduo's potential. I'm certainly in the bullish camp as well.

Here's why more upside may be on the horizon for this Chinese growth stock. (See Pinduoduo stock charts on TipRanks)

Strong Growth Potential

Pinduoduo comes with growth potential that cannot be ignored. Notably, Pinduoduo has also managed to eat up the market share of giants like Alibaba (NYSE:BABA) and JD.com (NASDAQ:JD). 

Accordingly, PDD stock is widely viewed as a pure growth play on the Chinese economy. Additionally, this is a company that's creating competition, and challenging large incumbents, while also providing a social good.

Yes, expectations are that Pinduoduo's triple-digit growth rate isn't sustainable. However, analysts believe that Pinduoduo’s revenue will grow at a rate of about 81% on a forward-looking basis. That's an extremely high growth rate for a company of Pinduoduo's size.

That said, Pinduoduo has largely built its market share basically by selling goods at a loss. This strategy is often employed by hyper-growth stocks, bullish on the margin expansion potential of a given sector.

This strategy has largely benefited farmers, something the CCP seems to like. Accordingly, Pinduoduo is likely to continue this strategy until the regulatory dust settles. Thus, there's an argument to be made that perhaps the company's projected revenue growth estimates are a bit light.

PDD Stock Surges following Robust Q2 Results

Revenue increased 89% on a year-over-year basis during Q2, coming in at $3.6 billion.

This revenue growth has largely been attributed to a sharp rise in the company's average monthly active users. Pinduoduo’s monthly active users jumped 30% in the second quarter, reaching 738.5 million. The number of active buyers saw a 24% year-over-year increase to 849.9 million.

Notably, the company also launched a massive $1.6-billion initiative to support the agricultural sector in China. While pleasing the government which has asked politely (i.e. demanded) private companies invest in social goods, Pinduoduo's management team appears to be intent on getting ahead of any negative regulatory crackdowns.

Accordingly, the company stated that it would pour in all its profit from the second, and upcoming, quarters to fund the agricultural initiative.

Wall Street’s Take

As per TipRanks' analysts rating consensus, PDD stock is a Strong Buy. Out of nine analyst ratings, there are eight Buy recommendations, and one Hold recommendation.

The average PDD price target is $137.22. The stock price targets range between a low of $88 per share, to a high of $170 per share.

Bottom Line

Pinduoduo is a major player in China’s agricultural supply chain. This is also a company that appears to be in good standing with the Chinese Communist Party.

Accordingly, unlike many of its peers, Pinduoduo stands to benefit from a favorable political and regulatory environment over the medium-term.

Over the longer-term, although Pinduoduo isn’t quite profitable right now, this company's expected long-term growth is impressive. Given this growth potential, along with some rather impressive recent results, it's hard to make the case that PDD stock is overvalued right now.

Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article

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