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 experienced a significant downturn over recent months. The stock is down over 25% from its 52-week high, reached in November 2025, and has fallen more than 10% in 2026.
The consumer discretionary firm is one of the largest e-commerce players in China, where it operates the platform Pinduoduo. In markets outside of China, PDD operates the e-commerce platform Temu. The company is looking in the face of legitimate concerns, including unfavorable U.S. trade policies against Chinese imports and the need to scale up its investments.
The company’s growth and profitability deteriorated significantly in 2025. However, even with this, PDD’s valuation now looks somewhat enticing. Shares trade at a forward price-to-earnings ratio near 8x, around 40% below their three-year average near 14x.
In the wake of PDD’s latest earnings report, now is a good time to assess the stock’s outlook going forward.
PDD: Revenue and Profits Move in Opposite Directions
In its fiscal Q4 2025, PDD posted revenue growth of 12%. Total sales were 123,912 million Chinese renminbi (approx. $17.72 billion). This figure slightly beat estimates of $17.57 billion.
The company’s adjusted earnings per diluted American Depository Share (ADS) fell 10%. The figure came in at $2.53, missing estimates of $2.88 by a fairly significant margin.
Full-year revenue rose by 10%, a massive deceleration versus 59% in 2024. Revenue growth wasn’t the only thing that saw a big drop off. Notably, the company’s full-year adjusted operating margin fell by approximately 625 basis points to 23.75%.
Much of the margin deterioration came as PDD’s costs of revenue increased by 23% during 2025, significantly faster than revenue growth. Research and development spending also soared 30%.
Creating a Stronger Ecosystem: Short-Term Pain for Long-Term Gain?
PDD is executing several initiatives that are hurting profitability in the near term, but it believes will lead to long-term value creation. This includes supporting merchants in their efforts to produce higher-quality and more consistent products, and strengthening its logistics network in rural parts of China. In short, PDD is significantly shifting its business model.
Traditionally, Pinduoduo was simply a platform merchants used to sell products. Looking forward, PDD wants to become a real resource and partner that merchants can use to improve their operations. The idea is that this will improve PDD’s ecosystem by creating stronger merchants and a better experience for consumers.
Importantly, the significant shift PDD is undertaking is in its early stages, with the firm committing to a three-year supply chain transformation in November 2025.
Unfortunately, the company doesn’t break out Temu revenue in its reports. However, PDD’s Transaction Services revenue is often used as a rough proxy. Sales here rose by 19%, their fastest rate over the past four quarters, implying improvement in this part of the business. The firm is also investing significantly in Temu, largely to mitigate tariffs on low-priced goods.
PDD’s Undemanding Valuation Points to Opportunity
Despite recent profitability challenges, PDD is a prolific cash generator, bringing in $15.3 billion in cash from operations (CFO) during 2025. The company only reports free cash flow (FCF) annually, and it has not yet released the 2025 figure.
Note that: FCF = CFO – Capital Expenditures (CapEx).
Based on 2024 numbers, it is possible to estimate a reasonable FCF figure for 2025. In 2024, the company’s CFO was $16.7 billion, and CapEx was just $132.5 million. This shows that CapEx creates a very minimal drag on the firm’s FCF generation. Let’s say CapEx tripled in 2025 to $400 million, which would be a huge increase compared to past trends. The company’s FCF would still be around $14.9 billion.
Using this as a 2025 FCF estimate, the company’s valuation implies zero to even slightly negative annual FCF growth over a multi-year period. In contrast, from 2021 to 2025, the company nearly quadrupled its FCF from $4.01 billion to this $14.9 billion estimate. That is equivalent to a compound annual growth rate of 39%.
Surely, the dynamics that allowed PDD to achieve such rapid FCF growth are significantly different today. Revenue growth has slowed to just 10%, compared to 59% in 2024, 90% in 2023, and 39% in 2022. Additionally, profit margins contracted big-time in 2025.
Still, it is fair to question whether investors are being overly pessimistic about PDD’s future. Will the company really go from FCF growth near 40% for several years to experiencing zero or negative growth over the coming years? Anything is possible, but it feels like this dynamic bakes in a significant margin of safety for PDD going forward. Many things would likely have to go wrong for the company not to live up to these already low expectations.
It's not unreasonable to think that after its investment phase, margins can stabilize and the company can generate moderate, profitable growth. Such a scenario could lead to significant upside in shares.
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