PDD Earnings: Raising Fair Value Estimate by 8% to $230 on Strong Revenue and Bottom-Line Beat

Narrow-moat PDD beat LSEG revenue and non-GAAP operating profit consensus by 15% and 89%, respectively, in the first quarter. PDD’s transaction services revenue and non-GAAP operating profit also track well ahead of our full-year estimate, thanks to substantially stronger Temu revenue and lower selling and marketing expenses. We raised our total revenue estimate by 8% for each of the next three years. We lifted our fair value estimate by 8% to USD 230 per ADS as we raised our non-GAAP operating profit estimates by 50%-59% for 2024-26 primarily to reflect stronger performance for Temu, partially offset by higher working capital. In our view, the shares are currently undervalued. We think Temu’s profitability will improve faster than previously estimated due to its introduction of the half consignment model, under which logistics costs will be borne by merchants. We also believe PDD’s domestic platform will be able to defend its position given the strong consumer perception of its value-for-money positioning. Our order of preference in the traditional Chinese e-commerce platforms is PDD, then JD.com, and then Alibaba.