One of Wall Street's biggest winners of the day is PDD, a business services company whose shares have climbed 4.4% to a price of $153.52 -- 20.1% below its average analyst target price of $192.14.
The average analyst rating for the stock is buy. PDD outperformed the S&P 500 index by 5.0% during today's afternoon session, and by 117.2% over the last year with a return of 145.1%.
PDD Holdings Inc., a multinational commerce group, owns and operates a portfolio of businesses. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.
PDD's trailing 12 month P/E ratio is 27.0, based on its trailing EPS of $5.69. The company has a forward P/E ratio of 11.8 according to its forward EPS of $12.97 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the consumer discretionary sector has an average P/E ratio of 22.96, and the average for the S&P 500 is 15.97.
PDD’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for PDD, we obtain a PEG ratio of 30.26, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To better understand the strength of PDD's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022 | 18,929,071 | 9,959,603 | 23 | 130.0 |
| 2021 | 14,742,796 | 8,683,283 | 10 | 162.5 |
| 2020 | 9,117,527 | 7,600,544 | -16 | 42.86 |
| 2019 | 4,329,611 | 4,645,540 | -28 | 65.85 |
| 2018 | 1,908,223 | 3,056,430 | -82 |
- Average operating margins: -18.6 %
- Average operating margins growth rate: 9.1 %
- Coefficient of variability (lower numbers indicate less volatility): 298.33 %
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From PDD's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022 | 7,032,979 | 19,778 | 7,013,201 | 56.33 |
| 2021 | 4,516,683 | 30,503 | 4,486,180 | 3.97 |
| 2020 | 4,321,323 | 6,597 | 4,314,726 | 103.05 |
| 2019 | 2,128,900 | 3,941 | 2,124,959 | 88.75 |
| 2018 | 1,129,798 | 3,975 | 1,125,823 |
- Average free cash flow: $3.81 Billion
- Average free cash flown growth rate: 44.1 %
- Coefficient of variability (the lower the better): 0.0 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, PDD is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
PDD's P/B ratio of 0.97 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Consumer Discretionary sector was 4.24 as of the first quarter of 2023.
PDD is by most measures fairly valued because it has an average P/E ratio, an exceptionally low P/B ratio., and generally positive cash flows with an upwards trend. The stock has strong growth indicators because it has a a PEG ratio of less than 1 and strong operating margins with a positive growth rate. We hope you enjoyed this overview of PDD's fundamentals.
