The Best Growth Stocks Nobody Is Talking About

If you ask people to name growth stocks, many of them will probably come to mind with the following household names: Amazon, Nvidiaand TeslaThese are all great companies that are leaders in their respective fields.

But there are lesser-known growth stocks that have a lot to offer investors. PDD Holdings (PDD 0.82%)a major Chinese e-commerce company, is one such company.

Amazing execution performance

AlibabaChina’s largest e-commerce company has historically attracted the attention of U.S. investors. And it’s understandable why Pinduoduo’s parent company, PDD, has flown under the radar. It’s only been around since 2015.

Many factors have contributed to Pinduoduo’s remarkable growth, but one key aspect of its early success was its focus on rural areas and smaller cities, along with industry leaders Alibaba. JD.com Competing for customers in the biggest cities, Pinduoduo has built up a huge mindshare (and market share) among underserved shoppers.

Founder and former CEO Colin Huang also saw the potential of the group-buying business model, where customers would combine orders, buy in bulk from suppliers and take advantage of lower prices. Customers loved the savings, and Pinduoduo soon became one of China’s largest e-commerce companies.

To fully appreciate PDD’s incredible rise, it took Pinduoduo just four years to report $100 billion in gross merchandise value (GMV), while Alibaba took nine years to reach that number.

When Pinduoduo hit that milestone in 2019, its revenue for the year was $4.3 billion. By last year, PDD’s revenue had soared to $34.9 billion, and it reported a record net profit of $8.5 billion.

Management has implemented world-class execution to enable PDD to reach its current scale.

Expanding from China to the Global Stage

The company surprised investors when Colin Huang stepped down as chairman in 2021. Just months earlier, he had also stepped down as CEO. In his last shareholder letter, Huang wrote about his expectations for Pinduoduo in the coming years.

A key point he made was that “Pinduoduo will strive to become a mature and global public institution.” And in the past few years, Pinduoduo has aggressively expanded overseas under another banner: Temu.

Temu debuted in the US market in 2022 and is now operating in over 50 markets. Although the brand is less than two years old, it has made solid progress. For example, Temu had 82 million active users in the US as of September 2023, and in recent months, the Temu app has achieved over 50 million monthly downloads.

Temu’s value proposition to its users is simple: high-quality products at attractive prices. To achieve this, it leverages Pinduoduo’s experience, know-how, and extensive supply chain resources to serve overseas consumers. It also invests heavily in marketing to acquire users globally, and its parent company’s strong financial position allows it to do so. PDD Holdings had $33.5 billion in cash and investments at the end of the first quarter, with virtually no debt.

Still, investors should keep in mind that Temu’s international expansion is not without its risks. It will have to face powerful competitors like Amazon, significantly improve quality control and logistics, and endure scrutiny from local regulators. The ultimate prize could be huge, but the road ahead is likely to be bumpy.

What it means for investors

Pinduoduo began its remarkable growth story by challenging the incumbents of China’s e-commerce industry, and now seeks to replicate that success on a global scale with Temu.

However compelling that story may be, investors should be aware of the risks of owning shares of a China-based company, including geopolitical tensions and regulatory oversight (both domestic and foreign). The poor market sentiment toward Chinese stocks explains why PDD Holdings is trading at just 17 times trailing earnings.

But for investors willing to take a risk to acquire a world-leading e-commerce company, PDD offers an impressive combination of rapid growth and profitability.