Street Fight: Jefferies says buy PDD as Goldman moves to sidelines

PDD Holdings (PDD) is in the spotlight on Monday after two Wall Street firms took different stances on the Chinese e-commerce giant. More bullish, Jefferies upgraded PDD Holdings to Buy after switching to a sum-of-the-parts valuation and factoring Temu’s valuation. Moving in the opposite direction, Goldman Sachs downgraded the stock to Neutral, citing cross-border and competition concerns.

BUY PDD: Jefferies upgraded PDD Holdings to Buy from Hold with a price target of $157, up from $117, as the firm switched to a sum-of-the-parts valuation, factoring Temu’s valuation. The firm’s revised price target is based on $139 for the domestic business $18 per share in value attributed to Temu, Jefferies tells investors. The firm expects Temu to generate about $37B gross merchandise volume in 2024, with narrowing loss margin as a percentage of GMV and expects domestic GMV to grow at about 20% year-over-year in 2024.

By geographies, Jefferies expects non-U.S. regions to increase in GMV contribution from 52% in 2023 to about 66% in 2024, thanks to the contribution from Europe and other countries such as the Middle East, Japan, Korea, and Southeast Asia. The firm also believes loss margin improvement is dependent on AOV and category expansion, while S&M spending is allocated more to non-U.S. markets after penetration to 48 countries and regions last year. Fundamentals in U.S. market are better compared to other countries as the latter are still in nascent stages of development, and Jefferies believes the recent Super Bowl event will drive consumer mindshare on Temu and higher AOV.

MOVING TO THE SIDELINES: More bearish, Goldman Sachs downgraded PDD Holdings to Neutral from Buy with a price target of $136, down from $196, as the firm re-assesses its view of the risk-reward given two incremental developments. Namely, the firm cites a rapidly shifting policy landscape around cross-border businesses, including the recent H.R.7521 bill in the U.S. passed by the House Energy and Commerce Committee focusing on foreign apps, and domestic e-commerce peers’ re-focus on growth for 2024 as commented in recent earnings, including Alibaba’s (BABA) management having laid out priority in reigniting GMV growth in its recent results.

Goldman’s price target cut reflects lowered growth outlook/multiples for domestic and incorporates lower value to Temu on markets’ concerns around cross-border policies. The firm believes the appetite for investors in valuing PDD’s Temu full business in PDD market cap may be suppressed in the near to medium term on the back of recent U.S. bills, until further policy clarity from key countries.

WHAT’S NOTABLE: Some U.S. lawmakers are seeking a ban on imports of goods sold on Temu, which is operated by Chinese ecommerce company PDD and is known for selling bargain products shipped from China, The Information’s Ann Gehan and Jing Yang reported last month. The group of lawmakers, which includes Representative Blaine Luetkemeyer, are contending that the platform hasn’t done enough to prevent its suppliers from using forced labor, the authors said, citing two people with knowledge of the conversations.

PRICE ACTION: In Monday morning trading, U.S.-listed shares of PDD have gained about 3% to $113.87.

“Street Fight” is The Fly’s recurring series of exclusive stories that highlight a stock or sector that is in focus amid divergent views from Wall Street analysts.