PDD Shares Drop After Q4 Results

The shares of narrow-moat PDD Holdings PDD (previously known as Pinduoduo) sold off 14% after fourth-quarter results were released, as revenue missed Refinitiv consensus as of March 20 by 3% and our estimate by 14%, and non-GAAP operating income missed consensus by 5% and our estimate by 6%. We estimate that gross merchandise volume year-on-year growth in the quarter decelerated and the take rate (transaction services and online marketing services revenue/GMV) declined sequentially. We think PDD’s long-term market share gain, take rate increase, and margin expansion trends have not changed.

We raise our fair value estimate for PDD to $105 per share from $100. The shares are trading at a 33% discount to our valuation as at the March 20 closing price. With the stock trading at 19 times 2023 non-GAAP earnings, we now believe PDD’s share price is attractive after its pullback.

Online marketing services revenue, which accounted for 78% of total revenue, registered 38% year-on-year growth in the fourth quarter, a fast deceleration from 58% in the third quarter. Transaction services year-on-year revenue growth decelerated rapidly to 86% in the fourth quarter from 102% in the third quarter. Given that transaction services year-on-year revenue growth tracks more in line with GMV growth compared with online marketing services revenue growth, we estimate that GMV year-on-year growth slowed down in the fourth quarter versus the third quarter. We also estimate that the take rate decreased sequentially in the fourth quarter, assuming transaction services revenue to GMV was flat in the two quarters. Sales and marketing expenses were 44.5% of sales in the fourth quarter of 2022, up from 41.7% in the fourth quarter of 2021, and these expenses were up 56% year on year versus 40% in the third quarter. We think this, together with an undisclosed rebate sum in the fourth quarter of 2021, were the reasons for the 250-basis-point lower operating margin year on year in the quarter.