On Tuesday, PDD Holdings (PDD) experienced a change in its stock outlook at Goldman Sachs. The firm downgraded the company's rating to Neutral from Buy and revised its price target to $136 from the previous $196. The adjustment comes in response to a reassessment of the risk-reward balance for PDD, influenced by two recent developments that could impact the company's future performance.
The first concern highlighted by analysts at Goldman Sachs is the evolving policy environment surrounding cross-border businesses. This includes the implications of the H.R.7521 bill, which was recently passed by the House Energy and Commerce Committee in the United States and focuses on foreign applications. The second factor is the intensified competition within the domestic eCommerce market. Notably, during recent earnings calls, Alibaba's management emphasized a renewed focus on growth for 2024, aiming to reignite Gross Merchandise Value (GMV) growth in a market where online e-commerce growth is expected to be 7% in 2024.
Analysts at Goldman Sachs anticipate a heightened competitive landscape in China, which may lead to a deceleration in the pace of take rate expansion for PDD's domestic business. Consequently, the firm has reduced its revenue forecasts for PDD for the years 2024 and 2025 by 3% and earnings estimates by 7% to 10%. This is due to expectations of slower domestic online marketing revenue growth, now projected at 22% for 2024, down from the prior estimate of 30% and 2% below consensus.
The revised price target reflects a shift in the valuation method from Discounted Cash Flow (DCF) to Sum of the Parts (SOTP), considering the lowered growth outlook and multiples for PDD's domestic operations. Furthermore, the valuation of Temu, PDD's non-US business, has been adjusted to account for market concerns regarding cross-border policy changes.
Analysts at Goldman Sachs have expressed that investor sentiment towards PDD's full market valuation may remain cautious in the short to medium term, pending further policy clarity from key countries. With a 23% potential upside to the new base case valuation and an 18% downside to the revised bear case valuation of $90, the firm's position on PDD has shifted to a more neutral stance. This adjustment also reflects a comparison with the median upside of 55% for other Buy-rated China Internet stocks covered by Goldman Sachs. Since being added to Goldman Sachs' Buy List on August 30, 2023, PDD's stock has risen by 18%, outperforming the MSCI China, KWEB, and Nasdaq indices, which have seen declines or slower growth in the same period.