Do Pinduoduo shares have room to jump another 26.5%?

Chinese e-commerce company Pinduoduo’s new initiatives may take some time to win favour among investors, analysts said.

  • Pinduoduo Inc (Nasdaq: PDD) share price falls to US$140.08 per share
  • The market has been ‘overly focused’ on its gross merchandise value, analysts say
  • JPMorgan suggested investors look at platform ARPU to evaluate Pinduoduo’s new strategy
  • Buy and sell Pinduoduo shares with an IG account

Could Pinduoduo’s stock hit US$177.24?

Shares of Shanghai-based e-commerce firm Pinduoduo slid 1% to close Tuesday’s trading session at US$140.08.

Consensus sentiment remained largely bullish, as 38 out of 50 analysts gave ‘buy’ ratings on PDD shares, eight recommended ‘hold’, and four had ‘sell’ calls.

On average, their 12-month target price was US$177.24, according to Bloomberg data, implying potential upside of 26.5% based on Tuesday’s closing price.

Last week, research teams that recommended ‘outperform’ or ‘overweight/attractive’ included Bernstein with a US$175 target price, CICC with a US$178 target, and Morgan Stanley eyeing US$150.

What’s the outlook on Pinduoduo?

Deutsche Bank last month rated the counter ‘buy’ and gave a US$192 target, saying it remained positive on Pinduoduo given its strategy on agricultural digitalisation and lower-tier city inclusion.

Shenwan Hongyuan analyst Zhao Lingyi maintained a ‘buy’ call with a target price of US$181.12, as its user scale is ‘at the apex of the whole industry’.

With ample cash reserves, the company will continue investing in infrastructure for Duo Duo Grocery and may consider introducing third-party partners in the long term, Zhao wrote.

China Renaissance opined that the market may need some time to digest Pinduoduo’s new initiatives, including its investment in Duo Duo Grocery, and to shift the spotlight away from gross merchandise value (GMV).

‘As the market seemed to have been overly focused on PDD’s GMV, the signal of possible GMV growth softening may be considered a negative sign’, even with a healthy performance in fundamentals, the China Renaissance analysts noted. They downgraded the stock to ‘hold’ last week.

What should Pinduoduo investors watch for?

JPMorgan analysts Alex Yao and Allen Li highlighted Pinduoduo’s expansion into an asset-heavy 1P (direct sales) e-commerce model, from an asset-light 3P (third-party) marketplace model.

Such a strategy is ‘sensible’, but will require the firm to build from scratch a wide range of offline capabilities such as merchandising, logistics management and warehousing, JPMorgan said, recommending ‘overweight’ with a US$190 target.

The analysts believe that the financial results in the next few quarters will be ‘critical for evaluating PDD’s success in this business strategy change’.

To evaluate the return on investment, investors should focus on platform ARPU (average revenue per user) and the absolute amount of net profit or loss, as the new strategy is designed to capture more consumer wallet share, JPMorgan suggested.

For 1Q2021, research teams expect an adjusted net loss per share of RMB1.809 on average, deepening from RMB0.15 in 4Q2020, based on estimates compiled by Bloomberg. Revenue could shrink to RMB20.4 billion, compared to RMB26.5 billion in the previous quarter, analysts forecast.

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