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On Thursday, Citi maintained a Neutral rating on Pinduoduo Inc. (NASDAQ: NASDAQ:PDD) but reduced its price target from $147.00 to $125.00. The adjustment follows Pinduoduo's third-quarter 2024 earnings report, which revealed revenues and non-GAAP net profit that fell short of market expectations by 3% and 6%, respectively. The underperformance was attributed to the negative effects of a newly introduced fee reduction and merchant support program.
According to Citi, these initiatives led to an increase in the cost of goods sold (COGS), as Pinduoduo began subsidizing logistics fees in remote areas. Management at Pinduoduo has confirmed their continued commitment to supporting merchants and investing in agriculture. This approach indicates a willingness to accept lower profitability in the long term as part of a strategic shift.
The rationale behind the price target reduction stems from Pinduoduo's efforts to transform its business model. The company is reportedly shifting away from its previous focus on strong monetization and high margins, which were achieved through merchant fee collection and logistics subsidies. Instead, Pinduoduo appears to be aiming to change the current "consumption downgrade trend" associated with its low-price strategy to a "consumption upgrade trend." This new direction involves backing higher quality merchants and fostering product innovation.
Following the earnings report and subsequent analysis, Citi's new price target of $125.00 is based on a 10x multiple of Pinduoduo's projected 2025 earnings per share (EPS) of $12.46. Despite the revised target, Citi's outlook remains cautious, highlighting the ongoing tariff overhang and uncertainties regarding the profitability trend as reasons for the continued Neutral/High Risk rating.
In other recent news, Pinduoduo Inc. reported a significant 44% year-over-year increase in total revenues, amounting to RMB 99.4 billion for Q3 2024. The company's net income also rose substantially to RMB 25 billion, up from RMB 15.5 billion in the same quarter of the previous year. Amidst these financial results, Jefferies maintained a Buy rating on Pinduoduo but lowered the stock's price target from $181.00 to $171.00, citing current market dynamics and the company's strategic responses to challenges and opportunities.
In response to the intense competitive environment in the domestic market, Pinduoduo has outlined strategic measures, including a substantial RMB10 billion fee reduction for merchants and efforts to improve logistics in rural areas. On the international front, the company is focusing on service quality and compliance with local regulations.
These initiatives, along with investments in technological innovation such as the Smart Agriculture Competition and the Global Agriino Challenge 2024, underscore Pinduoduo's commitment to long-term growth. Analysts from Jefferies remain confident in Pinduoduo's potential for growth despite the adjustments made to the stock's forecasted value.
InvestingPro Insights
Recent InvestingPro data provides additional context to Pinduoduo's financial performance and market position. Despite Citi's cautious outlook, Pinduoduo's financials show some positive indicators. The company's revenue for the last twelve months as of Q2 2024 stood at $47 billion, with an impressive revenue growth of 106.72% over the same period. This growth aligns with the InvestingPro Tip that analysts anticipate sales growth in the current year.
Moreover, Pinduoduo's gross profit margin of 62.44% supports another InvestingPro Tip highlighting the company's impressive gross profit margins. This robust margin could provide some cushion as the company implements its fee reduction and merchant support program, which Citi noted as impacting the recent earnings.
It's worth noting that Pinduoduo's P/E ratio (adjusted) of 11.85 suggests a relatively modest valuation compared to its growth rate, which could be attractive to investors despite the recent price target reduction. The company's strong financial position is further underscored by the InvestingPro Tip indicating that Pinduoduo holds more cash than debt on its balance sheet.
For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips on Pinduoduo, providing a deeper understanding of the company's financial health and market position.
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