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Thinking about what to do with your shares in PDD Holdings, or just now weighing up whether to get in? You are far from alone. This is a stock that has captured plenty of attention, swinging up over 31% year-to-date while still showing the scars of a tough 12 months with a nearly 9% drop in total return over the last year. If you zoom out, though, the five-year return sits at a robust 42%. The three-year number is especially head-turning, up over 120%. What contributes to a track record like that?

Much of the price movement is due to changing investor sentiment and shifting growth expectations. In recent months, optimism picked up thanks to stronger-than-expected earnings, solid revenue growth of around 11% annually, and the company’s ability to capture market share both inside and outside China. However, a recent dip below the analyst price target, along with a hefty 53% discount to intrinsic value based on discounted cash flow analysis, is giving some investors mixed signals.

This brings us naturally to the big question swirling around PDD: is the stock undervalued, overvalued, or fairly valued at this point? By one common approach, the value score for PDD Holdings stands at 5 out of 6. This means the stock is considered undervalued in five of the six standard checks analysts use. That's impressive, but what does it really mean for your investment decision?

Let’s dig deeper into the main ways analysts determine whether PDD Holdings is currently undervalued, fairly valued, or overvalued. And if you want the full picture, stick around because we will wrap up with a look at an even better way to think about valuation.

PDD Holdings delivered -9.1% returns over the last year. See how this stacks up to the rest of the Multiline Retail industry.

Approach 1: PDD Holdings Cash Flows

The Discounted Cash Flow (DCF) model works by forecasting a company’s future cash flows and then discounting those amounts back to their value in today’s dollars. This allows investors to estimate the current value of a business based on its capacity to generate cash in the future.

PDD Holdings currently produces Free Cash Flow of roughly $115.3 billion. Analysts expect this to grow steadily, projecting Free Cash Flow of about $212.6 billion by 2035. This projection represents nearly a doubling over the next ten years and reflects expectations for ongoing expansion and profitability.

After accounting for these projected cash flows and discounting them, the intrinsic value for PDD Holdings is estimated at $270.60 per share. When compared to the current share price, the stock appears to be 53.0% undervalued. This means it is trading well below what the DCF model suggests it should be worth. For investors, this could indicate notable upside potential if the company meets these forecasts.

Result: UNDERVALUED

Our DCF analysis suggests PDD Holdings is undervalued by 53.0%. Track this in your watchlist or portfolio, or discover more undervalued stocks based on DCF analysis.

Approach 2: PDD Holdings Price vs Earnings

The Price-to-Earnings (PE) ratio is widely considered a go-to metric for valuing profitable companies like PDD Holdings. This is because it offers a clear look at how much investors are willing to pay per dollar of earnings, helping to gauge whether a stock is expensive or cheap relative to its profits.

What constitutes a “normal” or “fair” PE ratio can vary depending on growth prospects, competitive pressures, and perceived risks. Generally, higher expected growth or lower risk justifies a higher PE, while slower growth or higher risk warrants a lower one.

PDD Holdings currently trades at a PE ratio of 13x. In comparison, the average for its Multiline Retail industry stands at about 22.8x, with an even higher peer group average of 56.8x. On the surface, this suggests PDD shares are valued much lower than both the sector and its closest competitors.

This is where Simply Wall St’s Fair Ratio becomes relevant. Taking into account PDD’s earnings growth rate, profit margins, business model, and risk profile, the Fair PE Ratio for the company is calculated to be around 28.9x. With the current PE of 13x well below this Fair Ratio, the numbers indicate the stock may be undervalued by this method as well.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your PDD Holdings Narrative

Narratives are a straightforward but powerful tool that allows you to connect your story—the reasons behind your outlook on a company—to the numbers, such as your assumed fair value and forecasts for future revenue, earnings, and margins.

Unlike traditional models or ratios, a Narrative links what is happening in PDD Holdings' underlying business, such as international expansion, regulatory changes, or customer growth, to a financial forecast and then turns that into a fair value for the stock.

On Simply Wall St, Narratives make this approach both easy and accessible. You can join millions of investors in shaping and comparing perspectives using real business drivers and dynamic data. This means your Narrative, and its resulting fair value, is kept up to date as soon as new news or earnings are announced. Your decisions will always reflect the latest information.

For example, one investor’s Narrative might project a fair value of $165.28 due to accelerating growth and international success. Another, taking a more cautious view, may see fair value closer to $87.07. Both are valid stories, and Narratives help you decide which aligns best with your beliefs and the current share price.

For PDD Holdings, here is a straightforward look at two leading PDD Holdings Narratives: 🐂 PDD Holdings Bull Case Fair Value: $163.07 Current share price is approximately 22.1% below this narrative's fair value. Revenue growth rate: -10.27% - PDD’s group-buying model and exclusive focus on marketplace services have driven rapid user and revenue growth, with 2023 revenue up 84.26% year-on-year. - The narrative projects continued expansion to potentially over $247 billion in revenue within 10 years, assuming improving profit margins as operations scale. - Key risks include volatile profit margins, aggressive competition from Alibaba and JD.com, and regulatory or legal headwinds in China. 🐻 PDD Holdings Bear Case Fair Value: $125.60 Current share price is approximately 1.2% above this narrative's fair value. Revenue growth rate: 13.28% - Analysts see PDD’s strategic investments in supply chain and ecosystem development as supportive of long-term growth, but potentially straining near-term profit margins due to increased costs. - Consensus expects moderate revenue and earnings growth, anticipating a price target only slightly above the current share price and forecasting a slight contraction in profit margins to 23.1% by 2028. - Risks include competition eroding market share, regulatory challenges, and the possibility that heavy investments may not translate into sustainable earnings and returns for shareholders. Do you think there's more to the story for PDD Holdings? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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