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Down 25%, Chinese Giant PDD Could Be a Strong Long-Term ValueSubmitted by Leo Miller. First Published: 3/30/2026. 
Key Points
- PDD, the owner of e-commerce platform Temu, has seen its share price take a meaningful hit.
- Profitability is tanking near-term, but that's part of the plan.
- The stock's valuation appears overly pessimistic, setting up a potential opportunity for strong long-term gains.
- Special Report: Elon Musk already made me a “wealthy man”
PDD (NASDAQ: PDD) is one of many stocks that have suffered a significant downturn in recent months. The stock is down more than 25% from its 52-week high reached in November 2025, and has fallen over 10% so far in 2026. The consumer discretionary firm is one of the largest e-commerce players in China, where it runs the Pinduoduo platform. Outside China, PDD operates the e-commerce platform Temu. The company faces legitimate headwinds, including unfavorable U.S. trade policies on Chinese imports and the need to scale up investments.
Growth and profitability deteriorated sharply in 2025. Even so, PDD’s valuation now looks relatively attractive: shares trade at a forward price-to-earnings ratio near 8x, roughly 40% below their three-year average of about 14x. In the wake of PDD’s most recent earnings report, now is a good time to reassess the stock’s outlook. PDD: Revenue and Profits Moving in Opposite DirectionsIn fiscal Q4 2025, PDD posted revenue growth of 12%. Total sales were 123,912 million Chinese renminbi (approx. $17.72 billion), slightly above estimates of $17.57 billion. Adjusted earnings per diluted American Depository Share (ADS) fell 10% to $2.53, missing estimates of $2.88 by a notable margin. Full-year revenue rose 10%, a sharp deceleration from 59% in 2024. Revenue wasn’t the only metric to soften: full-year adjusted operating margin dropped roughly 625 basis points to 23.75%. Much of the margin deterioration came from a 23% rise in cost of revenue in 2025, well ahead of topline growth. Research and development spending also surged about 30%. Creating a Stronger Ecosystem: Short-Term Pain for Long-Term Gain?PDD is executing several initiatives that are weighing on near-term profitability but are intended to create long-term value. These include supporting merchants to produce higher-quality, more consistent products and strengthening logistics in rural parts of China. In short, PDD is shifting its business model. Historically, Pinduoduo was primarily a marketplace for merchants to sell products. Going forward, PDD aims to become a resource and partner that helps merchants improve operations—an approach designed to strengthen the overall ecosystem and improve the consumer experience. Importantly, this transformation is still in its early stages: the company announced a three-year supply chain transformation in November 2025. PDD does not break out Temu revenue, but Transaction Services revenue is often used as a proxy. Sales in that category rose 19%—the fastest rate over the past four quarters—suggesting improvement in that part of the business. The firm is also investing heavily in Temu, largely to mitigate tariffs on low-priced goods. PDD’s Undemanding Valuation Points to OpportunityDespite the profitability challenges, PDD remains a prolific cash generator, producing $15.3 billion in cash from operations (CFO) in 2025. The company reports free cash flow (FCF) only annually, and the 2025 FCF figure has not yet been released. Note that: FCF = CFO – Capital Expenditures (CapEx). Using 2024 as a reference, we can estimate a plausible 2025 FCF. In 2024, CFO was $16.7 billion and CapEx was just $132.5 million, indicating CapEx has historically been a minimal drag on FCF. If CapEx tripled in 2025 to $400 million—a material increase by past standards—FCF would still be around $14.9 billion. Using this as a 2025 FCF estimate, the company’s current valuation implies zero, or even slightly negative, annual FCF growth over a multi-year period. By contrast, from 2021 to 2025 PDD nearly quadrupled FCF from $4.01 billion to this $14.9 billion estimate, a compound annual growth rate of about 39%. Clearly, the dynamics that powered such rapid FCF growth are different today. Revenue growth has slowed to 10% (versus 59% in 2024, 90% in 2023 and 39% in 2022), and margins contracted meaningfully in 2025. Still, it is reasonable to ask whether investors are being overly pessimistic. Must PDD really move from FCF growth near 40% to zero or negative growth for the foreseeable future? That outcome would require several things to go wrong, suggesting a considerable margin of safety at current prices. It’s plausible that once the current investment phase winds down, margins stabilize and the company resumes moderate, profitable growth. If that happens, upside in the shares could be substantial. |
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