PDD (PDD -0.02%), more commonly known as Pinduoduo, has generated massive gains for its investors since its IPO in July 2018. The Chinese e-commerce giant went public at $19, and it now trades at $135 with a market cap of $180 billion.
That makes PDD nearly as valuable as market leader Alibaba (BABA -0.40%), which is currently worth $187 billion. Alibaba's stock has declined more than 60% since PDD's market debut as it grappled with competitive, regulatory, and macro challenges. Meanwhile, PDD's stock soared more than 600% as it dazzled investors with its sizzling growth rates.
Image source: Getty Images.
Could PDD grow into a trillion-dollar stock by 2030 and leave Alibaba in the dust? Let's review its growth rates, long-term challenges, and valuations to find out.
PDD is growing a lot faster than Alibaba
From 2018 to 2022, PDD grew its annual revenue at a compound annual growth rate (CAGR) of 78% to 130.6 billion yuan ($18.9 billion). Analysts expect its revenue to surge 81% to 236.2 billion yuan ($33.2 billion) in 2023.
From fiscal 2019 to fiscal 2023 (which ended last March), Alibaba grew its revenue at a CAGR of 23% to 868.7 billion yuan ($126.5 billion). But for fiscal 2024, analysts only expect its revenue to rise 8% to 940.7 billion yuan ($132.2 billion).
PDD is still a lot smaller than Alibaba, but it's growing a lot faster for three simple reasons. First, it carved out a niche with a discount marketplace that encouraged its shoppers to team up on social media platforms to score bulk discounts. That strategy enabled it to expand rapidly across China's lower-tier cities and pull shoppers away from Alibaba's Taobao (consumer-to-consumer) and Tmall (business-to-consumer) marketplaces.
Second, PDD capitalized on its initial growth spurt to build an online agricultural platform that allowed farmers to directly ship their fresh produce to online shoppers. That streamlined strategy enabled PDD to sell fresh produce at lower prices by cutting out middlemen retailers like supermarkets and online grocery stores. It leveraged that first-mover's advantage to become China's largest agricultural marketplace.
Lastly, China's antitrust regulators hit Alibaba with a record $2.75 billion fine in 2021 and curbed the expansion of its e-commerce business by banning its exclusive deals with merchants, closely scrutinizing its loss-leading promotions, and limiting its ability to make new investments and acquisitions. As Alibaba struggled with those existential setbacks, PDD expanded into China's top-tier cities with higher quality products and higher-end brands.
PDD also turned profitable in 2021 as it phased out its lower-margin first-party marketplace and reduced its logistics costs. Its net profit quadrupled in 2022, and analysts expect 62% growth in 2023. Those are incredible growth rates for a stock that trades at just 21 times forward earnings and four times next year's sales.
PDD's long-term challenges
PDD plans to continue expanding its Chinese e-commerce marketplaces while growing overseas with Temu, a cross-border shopping app that enables its Chinese merchants to directly sell their products to overseas buyers.
Temu is already one of the most popular shopping apps in the U.S. and Europe, but it could face unpredictable regulatory challenges amid rising tensions between the U.S. and China. Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google already suspended Pinduoduo's main app from its Play Store last year due to cybersecurity concerns.
PDD could also become the next big target for China's antitrust regulators if it ever surpasses Alibaba as the country's largest e-commerce company. That crackdown could cause PDD to suffer an abrupt slowdown like Alibaba.
PDD also isn't completely immune to the macro headwinds. It's been growing a lot faster than Alibaba or JD.com (NASDAQ: JD) through China's economic slowdown, but it could still struggle if a prolonged recession occurs over the next few years.
The mathematical path toward a trillion-dollar valuation
Assuming PDD's valuations hold steady, it would need to grow its revenue and earnings at a CAGR of 28% from 2023 to 2030 reach a $1 trillion market cap by the final year.
From 2023 to 2025, analysts expect PDD's revenue and net income to both grow at a CAGR of 32%. Those estimates are impressive, but they also indicate its business is gradually maturing as it saturates the Chinese market. If PDD matches those long-term estimates, it would only need to grow its revenue and earnings at a CAGR of 26% from 2025 to 2030 to maintain a seven-year CAGR of 28% from 2023 to 2030.
PDD clearly has a path toward becoming a trillion-dollar stock by the end of the decade if it continues firing on all cylinders and dodges an antitrust crackdown. If that happens, investors will eventually revalue PDD as a high-growth stock -- and those higher valuations could make it even easier to overtake Alibaba and join the four-comma club.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and JD.com. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
