How Pinduoduo Became A Buy-The-Dip Opportunity As Chinese Stocks Tumble

The Chinese stock market is having a rough 2022. 

For the year, the S&P 500 cash index is lower by nearly 17% (3,970). The iShares China Large-Cap ETF FXI is off by 26% and the KraneShares CSI China Internet ETF KWEB has tumbled 36% ($26.70).

If you are taking the declines since their peaks in early 2021, the numbers are much more daunting.

Despite the recent chaos in China regarding COVID-19 restrictions, the market and some individual issues have distanced themselves from their recent lows. One of those issues is Pinduoduo Inc. PDD, which is the PreMarket Prep Stock of the Day.

The Company: Pinduoduo is the third-largest e-commerce platform by gross merchandise volume and the largest platform by active buyers in China. In 2021, it achieved 2,441 billion yuan ($345 billion) of gross merchandise volume and 2,810 billion yuan ($397) billion of annual spending per active buyer. It had 11.5 million active merchants in 2021 and 882 million active buyers in the year ended March 2022.

It is one of the top two players in next-day grocery self-collect services (similar to community group purchasing), where groups of consumers place fresh food and grocery orders online and collect at designated points the next day with the help of "group leaders" in each community.

Fall From Grace: Pinduoduo made its all-time high in February 2021 at $212.60 and backed off to end the month at $171.16. Since that time, it has had only four months of meaningful price action to the upside, and its performance this month has been the best by far.

The issue bottomed way ahead of the U.S. markets in March 2022 at $23.21. That exceeded its pandemic low by $7 and was its lowest level since August 2019, when it bottomed at $21.22.

Late October Run: Before the opening Oct. 24, U.S.-listed Chinese stocks plunged in the premarket session on amid fears over President Xi Jinping maintaining dominance following the country's weeklong Party Congress.

In that session, the issue swooned from $58.97 to $44.46, with an intraday low of $38.80. It turned out to be a great “buy the dip” opportunity, as the issue was back at $54.83 only five sessions later.

Until the last two days of price action, the high for the move was $72.74 and the closing high was $70.97. Pinduoduo retreated from that area and ended last week at $65.75 ahead of its third-quarter report.

Pinduoduo's Q3 Beat: Before the opening on Monday, the company reported quarterly earnings of $1.21 per share, which beat the analyst consensus estimate of 65 cents by 86.15%. This is a 255.88% increase over earnings of 34 cents per share from the same period last year.

The company reported quarterly sales of $4.99 billion, which beat the analyst consensus estimate of $4.31 billion by 15.8%. This is a 49.54% increase over sales of $3.34 billion. in the same period last year.

Recent Price Action: Despite the retreat in the U.S. markets to kick off the week, Pinduoduo is off to a great start. Following Monday’s third-quarter beat, the issue added $8.30 or 12.6% ($65.75 to $74.05). The rally continued in Tuesday’s session: the issue reached $80 and is now trading actively in the mid-$78 handle.

At $78.50, that makes for a gain of $4.45 or 6%.

PDD Moving Forward: Pinduoduo is trading at levels not seen since November 2021, when it peaked at $95.58 and crumbled to end the month at $66.30.

During that slide, the issue did put in a pair of highs at the $82 area (Nov. 23, $81.79 and Nov. 24, $82.10). The closing price on the 23rd of $81.36 adds to the significance of this area.

If in fact, the issue can clear that level, the next daily high is from Nov. 22, 2021 at $84.06.

Investors who are not attempting to exit on strength but potential weakness may want to focus on whatever the closing high is for the recent rebound. If the upward momentum stalls and that area becomes a resistance level, it may signal the rally may be losing steam.