Bull vs Bear: Chinese Stock Showdown
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We're flipping the script today on Motley Fool Money as we put our bull horns on and sharpen our bear claws to dig into Chinese stock earnings.
It's Tuesday, November 18th. Welcome to Motley Fool Money. I'm your usual host, Emily Flippen, but today we're putting Fool contributor Jason Hall in the big chair so that you, Jason, can help facilitate a fun debate today between myself and Fool analyst Toby Bordelon.
Emily, I am never short on opinions. We know that. But Motley Fool Money is a good idea to align those opinions with expertise. This morning, we have earnings from four of the largest Chinese companies. I know that you lived in China for four years. You have plenty of bullish thoughts that can be backed up with actual knowledge and expertise. We thought it would be fun to match you up with our notorious Chinese stock skeptic, Toby Bordelon, to have a bit of a fast-paced bull bear debate. We'll get to iQiyi, Weibo, and Baidu later. But first, let's Start with a stock that you actually own in your portfolio. That's PDD Holdings. Ticker symbol is PDD, formerly known as Pinduoduo. It's an e-commerce powerhouse.
Shares are down today after what seemed like a pretty solid quarter. Emily, is this a buying opportunity?
I actually do think it's a buying opportunity, Jason. Now, to your point, I do own this in my personal portfolio, so I'm arguably a little biased here. But this was a solid quarter. Revenue growth wasn't anything to write home about, but it was in line with what the company was expecting, given the fact that they are operating in a more competitive and admittedly tariff-ridden environment. But the reason I like this company is because of its business model. Virtually everything everything flows through to the bottom line with this business. PDD on both its Pinduoduo marketplace in China, as well as its Timu marketplace that serves the global audience, doesn't generally own the inventory that it lists.
It's just like the payment infrastructure and logistics platform. On its Chinese side, a majority of the revenue comes from ad placements. PDD Holdings was able to grow profits at nearly twice the rate of revenue in the quarter Even with all of the craziness going on with issues of dropshipping and the removal of De Minimis in the United States, it has nearly 25% net income margins over the past year. I'm so compelled by this opportunity.
Emily, I can feel your energy here. But, Toby, I have a feeling you may be a little bit less glass half-full than Emily is.
I got to be honest here. I'm not sure I would call 9% growth solid for a company like this. It's an e-commerce platform in a theoretically fast-growing Chinese consumer economy. 9% ain't going to cut it, because it's not meeting investor expectations here. If they can't get the growth rates up, I think the valuation multiples are going to come down. They're going to come down fast. My other problem here is the heavy spending they're doing. Management even went so far as to warn that profits are going to fluctuate due to things like higher marketing costs, merchant subsidies, investment in the platform. It's looking like a lot of what they expect this growth to be is going to be a lot more expensive going forward.
It signals the platform may not be very sticky for consumers.
Oh my gosh, Toby, you think the valuation multiples are going to come down? I mean, okay, this business has a market cap of somewhere like $180 billion. Nearly $60 billion of that is in cash. So, it has an enterprise value to EBITDA of less than 10X while growing its bottom line earnings per share double digits. I mean, even if the top line is only growing 9%, that's downright cheap. That's too cheap to ignore.
Now, look, it's only cheap with the assumption that you're going to get a rebound on those growth rates. If we are in a permanent growth decline, the market is going to reset to a lower valuation at some point. From a platform and business investment standpoint, this could be a money pit, not a growth opportunity. The bigger picture, Emily, I think, is we don't know what's driving these results.
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