Emphasis On R&D And Global Engagement Will Strengthen Market Position

Key Takeaways

• Merchant support programs and cost reductions aim to drive revenue growth by enhancing innovation and expanding market reach.
  
• Emphasis on R&D, compliance, and global engagement strengthens market position, potentially boosting long-term margins and consumer trust.
  
• Intense e-commerce competition and global uncertainties may limit revenue growth, while high expenses and strategic investments pressure short-term profitability and earnings.

Catalysts

A multinational commerce group, owns and operates a portfolio of businesses.

• The CN¥10 billion fee reduction program aims to lower costs for merchants, enhancing their ability to innovate and improve product offerings, which can drive revenue growth by attracting more merchants and improving the consumer experience.
  
• Logistics support measures, including the elimination of transshipment fees in Western China, enable merchants to reach underserved markets, potentially expanding revenue streams by tapping into new customer bases.
  
• The high-quality merchant support program empowers merchants with strong innovation capabilities, likely boosting revenue growth by increasing the supply of high-quality, in-demand products on the platform.
  
• The emphasis on R&D and ecosystem development reflects a commitment to strengthening the platform’s technological and supply chain capabilities, which could improve net margins in the long run by optimizing operations and reducing costs.
  
• The focus on compliance, high standards, and global market engagement demonstrates a long-term strategy to build a sustainable platform ecosystem, potentially enhancing earnings through increased consumer trust and expanded market share.

PDD Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PDD Holdings's revenue will grow by 19.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.1% today to 23.7% in 3 years time.
• Analysts expect earnings to reach CN¥150.7 billion (and earnings per share of CN¥97.84) by about January 2028, up from CN¥108.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥211.0 billion in earnings, and the most bearish expecting CN¥109.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 1.9x on those 2028 earnings, down from 9.1x today. This future PE is lower than the current PE for the US Multiline Retail industry at 20.0x.
• Analysts expect the number of shares outstanding to grow by 3.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.55%, as per the Simply Wall St company report.

PDD Holdings Future Earnings Per Share Growth

Risks

• Intense competition in the e-commerce sector and external challenges have led to a moderation in revenue growth and may further impact profitability over time. This could pressure net margins as increased spending is required to stay competitive.
  
• Investments in fee reduction and ecosystem support, while beneficial long-term, are expected to impact short-term financial results, potentially reducing operating profit margins and earnings in the near future.
  
• High operating expenses, including sales and marketing costs and R&D investments, may squeeze net income as a percentage of total revenues remain high despite slight reductions year-on-year.
  
• Exposure to the complex and evolving global market environment introduces uncertainties and potential downward pressure on revenues and earnings due to fluctuating market conditions and regulatory landscapes.
  
• Limitations of the third-party platform business model and operational inefficiencies may lead to higher costs relative to competitors, which could hinder the ability to fully capitalize on macroeconomic opportunities, negatively affecting long-term net income growth.

Valuation

• The analysts have a consensus price target of CN¥148.59 for PDD Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CN¥229.26, and the most bearish reporting a price target of just CN¥101.15.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥636.3 billion, earnings will come to CN¥150.7 billion, and it would be trading on a PE ratio of 1.9x, assuming you use a discount rate of 7.6%.
• Given the current share price of CN¥96.99, the analyst's price target of CN¥148.59 is 34.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.