Chinese online shopping website Temu has been getting quite a bit of attention lately. A hit with shoppers, it’s been stealing market share from Amazon and other e-commerce websites. Should I buy shares in Temu-owner PDD Holdings (NASDAQ:PDD) – which is listed in the US – to capitalise? Let’s discuss.
The bull case
Looking at the investment case for PDD Holdings, I have to say it has me interested.
For a start, it has an insanely popular shopping platform in Temu. According to Apple, Temu has been the most downloaded app in the US this year. It has also been one of the most downloaded apps here in the UK.
One reason the e-commerce site’s doing so well is that it uses a range of ‘gamification’ strategies to keep users engaged. As a result, they tend to spend a lot of time on the platform and make more purchases.
Secondly, PDD’s revenues are surging. For Q3, they climbed a whopping 94% year on year to CNY69bn. That was miles ahead of analysts’ forecasts.
Third, the stock doesn’t look that expensive. At today’s share price, PDD has a forward-looking price-to-earnings (P/E) ratio of just 20. Given the level of growth, that’s a pretty low valuation.
Finally, some big-name investors have been piling into this stock. 13F regulatory filings show that in Q3, both David Tepper (of Appaloosa Management) and Brad Gerstner (of Altimeter Capital) bought PDD Holdings stock. These are some of the most clued-up investors in the world. In other words, some ‘smart money’ has been buying here.
The bear case
There are quite a few risks to consider with PDD shares though. Looking at reviews of Temu, it’s fair to say that a lot of shoppers aren’t actually that happy with the platform.
On Trustpilot, for example, 36% of reviewers give the site just one star (out of five). A lot of shoppers complain about the low quality of goods, long delivery times, and the poor customer service levels offered. Is this kind of business sustainable?
Another issue that needs to be highlighted is the possibility of controversial labour practices. Temu prices are insanely cheap (some products are 80% cheaper than on Amazon). And earlier this year, US lawmakers warned of an “extremely high risk” that products sold on the platform have been made with forced labour.
This issue can’t be ignored. Just look at what happened to Boohoo shares when the online fashion retailer came under pressure for poor labour practices (they’re down about 90% from their highs).
PDD Holdings has also received some attention from short sellers recently. For example, back in September, US research firm Grizzly Research posted a scathing report on the company.
“We believe PDD is a dying fraudulent company and its shopping app Temu is cleverly hidden spyware that poses an urgent security threat to US national interests”, it wrote.
Grizzly Research also said it believes PDD’s financials are “notoriously unreliable”.
My move now
Weighing this all up, I’m going to hold off on buying PDD Holdings shares for now. There’s a lot to like about the company. But there are also significant risks, to my mind.
So in the near term, I’m going to sit on the sidelines and focus on other growth stocks.
