PDD Holdings stock has surged but faces a mountain of risks

By:
on May 23, 2024
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  • PDD Holdings share price has jumped by over 620% in the past five years.
  • The company’s revenue and profits have continued growing.
  • Its stock has also formed a double-top pattern on the daily and weekly charts.

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PDD Holdings (NASDAQ: PDD) stock price is doing well as investors cheer its strong performance. It has surged by over 130% in the past 12 months and by 620% in the past five years, giving it a market cap of over $200 billion.

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PDD faces substantial risks

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PDD Holdings, the parent company of Pinduoduo and Temu, has been one of the best-performing companies in the past few years. Its annual revenue has soared from over $4.3 billion in 2019 to over $34 billion in 2023.

It has also moved from a net loss of over $1 billion in 2019 to a profit of more than $8.4 billion. In its recent report, the company said that its revenue rose by 131% to over $10.2 billion while its net income jumped to more than $3 billion.

However, PDD Holdings faces a major risk, especially because of its Temu product. The company launched Temu in 2022 as part of a strategy to expand its business globally. Today, Temu is one of the most downloaded apps around the world.

Temu does a lot of business in key countries in Europe and in the United States. As a result, I believe that the US is its biggest risk because of the two important bills that have passed Congress and signed into law.

Recent TikTok ban bill

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The first law was aimed at TikTok, the giant social media company. It mandates the firm to either sell its application or exit the United States altogether. Washington argues that the company collects data and makes it available to Beijing.

It also leaves the door open to a president to designate an app or a website a national security risk. Like Grizzly Research noted, Temu is a bigger target than TikTok for two reasons. First, unlike TikTok that stores data on Americans in the US, Temu has not done that. Most of its data is stored in China and other countries.

Second, TikTok collects basic user data like location and other interests. Temu, on the other hand, collects even credit card data, which is more delicate. Therefore, there is a possibility that the company will also be banned by either Biden or Trump. The bill states:

“The Department of the Treasury can issue a directive prohibiting U.S. persons from engaging in any transaction with any person who knowingly provides or may transfer sensitive personal data subject to U.S. jurisdiction to any foreign person subject to Chinese influence.”

The other law is the Uyghur Forced Labor Prevention Act which prevents sale of products made in Xinjiang region. US policymakers could accuse the company of doing business in the region and sanction it.

PDD Holdings has other risks. As I have noted before, it is unclear whether Temu’s business model of selling cheap items will work out in the long term. Estimates are that Temu loses about $30 for each sale while other similar companies like Wish have failed.

Also, there is a possibility that the US government will repeal the Section 231 of the Tariff Act of 1930, which exempts most small packages sent to the US from paying taxes. Elimination of that tax break will make its products more expensive.

PDD Holdings’ stock technical risks

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PDD stock

PDD chart by TradingView

Meanwhile, PDD Holding’s stock price has one major technical risk in that it has formed a double-top pattern whose neckline is at $108. This pattern is often followed by a major decline, especially if it fails to find buyers above the double-top level at $156.59.

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