PDD Holdings: Sell-Off Isn't Unwarranted But Likely Overstated, Reiterate Buy

Earnings Performance and Market Reaction - PDD Holdings' stock declined nearly 30% on August 26 after its Q2 earnings release, retesting lows last seen in October 2023 [1] - Despite a 86% YoY revenue surge, the company failed to outperform Wall Street's revenue estimates, indicating high market optimism [1] - Transaction services revenue increased by 234% YoY, while online marketing services grew only 29% YoY [1] Competitive Landscape and Strategic Shifts - PDD plans to invest more aggressively from Q3 to address heightened competition, which may worsen profitability metrics in the near term [2] - The company faces challenges from Amazon's encroachment and regulatory scrutiny over merchant practices, including non-compliant merchants [2] - PDD needs to undertake a structural shift in its merchant ecosystem to adapt to changing consumer preferences and competitive pressures [2] Valuation and Market Sentiment - PDD's valuation grade improved from "D" to "B-" over the past six months, reflecting significant pessimism after the selloff [4] - The company's adjusted forward PEG ratio of 0.32 is nearly 80% below the sector median, highlighting its growth-adjusted valuation appeal [4] - Despite the selloff, PDD remains priced for growth, suggesting a valuation bifurcation [4] Investment Strategy and Future Outlook - PDD's decision to reduce transaction fees and invest in higher-quality merchants is deemed appropriate but may impact revenue and profitability in the near term [3] - The company's uptrend continuation thesis has weakened but not decisively overturned, with potential for dip-buyers to return after the selling intensity subsides [5] - Management's focus on regulatory compliance and high-quality merchant growth is expected to mitigate long-term risks [5]