We were wrong on PDD Holdings Inc. (PDD) a few months ago.
Looking back to March, the Technical Set-Up was sub-optimal with the chart near 6-month lows and the stock under distribution.
Also China Stocks were in their own private Bear Market. Now though, the Group is right.
Check out the iShares FTSE China 25 (FXI) ETF.
Take a look at some individual China names:
Trip.com Group Ltd. (TCOM). So strong!
Futu Holdings Ltd. (FUTU). Major accumulation here:
FUTU 5-MONTH CHART
PDD’s technicals have improved demonstrably. Relative Strength is inflecting ahead of the stock. Also, it is carving out the upper band of a very powerful base.
Now, observe the accumulation on 30day/60min chart:
Importantly, PDD’s fundamentals are top tier. Last quarter, Q4 numbers crushed it:
We think PDD’s momentum continued into Q1’24. Numbers appear too low.
While the YoY comparisons will get more difficult as the year progresses, we think the current modeling by the Street is too negative. Please take a look:
Yes, we get it. The numbers are not real.
But with the Bull Market flexing its muscles once again, we think the timing is right for PDD's incredible fundamentals – whatever they may truly be - to be rewarded.
We think PDD goes to $200 by Q4’24, based off of 13x likely $15 in EPS. So, $55-$60 bucks of upside. Importantly, we see a very defined risk of only 6 to 10 points down. So an almost 6-to-1 Risk/Reward here.
So, even though it’s a super-volatile China name, we love the PDD set-up and give it a Conviction Level 9.
As for risks, headline risks remain. But we think this is less of an issue for PDD. Recently the company decided to pull back from the US Market. PDD has shifted its focus to growing in Europe and the Middle East instead.
So while PDD’s Top Line beats will probably not surprise like they have been, the bottom line will likely inflect faster with the decreased marketing-spend in the US. In this tape, that's likely a winning formula.
Gross Margin compression is another key risk. As Temu becomes a larger part of the mix, GMs may compress faster than we are currently anticipating. If this occurs, our projections for $15 EPS in 2025 could be off base.
We plan to slowly scale into our position and hold it into the May 22nd Q1 report. Keep in mind, this is PDD, a wild stock. As such, we plan to keep the allocation small ahead of the print.
If PDD comes through with another impressive beat AND Price/Volume confirm with a decisive close above 52wk Highs, we will increase our exposure thereafter.
Should PDD break out, we will take off risk incrementally. Should the stock move into the $160-$170s, we will take off another tranche of stock. We will then hold a third-position for the longer-term.
STOP LOSS: We will use a stop of $142 after earnings.
----------------------------------------------------------------
Disclosure: We are long PDD stock and in-the-money Calls. We may change our positioning at a moment’s notice, without notifying you of any such moves.
Disclaimer: All of the information in this piece has been prepped by Inflections Consulting LLC. Readers should know that it would be incorrect to assume that past and future names of interest will be profitable or will not turn into a loss. Inflections Consulting LLC does not and will not assume any liability for any loss that could occur if you invested in such stocks written about.
All the content in these reports have been prepared by Inflections Consulting LLC. We believe our sources to be reliable, but there is no guarantee here. The information in this piece does not constitute either an offer nor a solicitation to buy or sell any of the securities name-dropped in this piece.
All contents are derived from original or published sources believed reliable, but not guaranteed. This report is for the information of Top Tier Inflections members/subscribers, only. Absolutely none of our content may be reproduced in whole or in part without prior written permission from Inflections Consulting LLC. All rights reserved.
In no shape or manner should the views expressed in this piece be considered investment advice. We reserve the right to change our positioning in our PDD stock and options positions at a moment’s notice without updating you on any such change in opinion and positioning. That may be tomorrow, even before our price target is hit. Facts change, our opinions can change quickly too.
Investors need to consider their investment risk tolerance before investing in the stock market and also before investing in any of the stocks mentioned in this report.
