We recently compiled a list of the 7 Best E-commerce Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where PDD Holdings Inc. (NASDAQ:PDD) stands against the other e-commerce stocks to buy according to hedge funds.
The Retail Debreif: Growing Consumer Confidence in the US
E-commerce is growing faster than expected and as new avenues of selling online open up, companies are bound to keep up with trends and innovative strategies. According to a report by Forbes, the e-commerce industry is expected to grow to a valuation of $7.9 trillion by 2027 from $6.3 trillion in 2024. In 2027, 23% of retail purchases are expected to be made online, up from 20.1% in 2024.
In the United States, low-income households, with a yearly income of $50,000 or less, happened to spend the most on online spending compared to other groups. On October 17, Reuters reported that retail sales in September increased, as gas prices fell, allowing consumers to spend elsewhere. Overall, the average consumer in the United States spent mostly on clothing, health and personal care stores, and miscellaneous items. Amid rising consumer confidence and spending, the Atlanta Fed raised its GDP estimates for Q3 to 3.4%, up from a previous guidance of 3.2%. Overall, retail sales grew by 0.4% last month.
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Chinese E-commerce Platforms: A Threat or Opportunity?
Chinese e-commerce stocks have been on the rise, despite uncertain macro-economic conditions in the country. As the Chinese government attempts to stimulate the economy, these companies may perform better than expected, meaning other global e-commerce stocks will have to ramp up their investments in sustainable growth strategies. On October 21, Reuters reported that the world’s largest luxury brands in France and Italy reported a decline in quarterly sales as the growing second-hand and grey market for luxury goods in China continues to expand, and demand for luxury brands falls. The second-hand luxury goods market is estimated to be valued at $57 billion, fueled by platforms such as DeWu, where used luxury products are sold at discounted prices. Reuters estimates that DeWu reported a 19% increase across its 48 brands during Q2 2024. Since China makes up 25% of the revenues in the retail sector, consumers shifting to local platforms may cause a hit to global commerce and retail companies.
On October 9, Reuters reported that amid fierce market competition online shopping has been increasing in Europe and other parts of the world. The online shopping market in Europe is expected to reach EUR 958 billion in 2024, up from EUR 887 billion in 2023, representing an increase of 8%, or 5% in inflation-adjusted terms. However, e-commerce experts in Europe share concerns over the growing popularity of cheap e-commerce platforms, especially Temu, increasing competition for local brands. On the flip side, Temu states that it believes in supporting local brands and has invited local merchants in the United Kingdom, Germany, France, Italy, and Spain to join the platform.
The e-commerce industry is rapidly changing and growing, thanks to technology, macroeconomic conditions, and geopolitics. Despite the turmoil, some stocks continue to outperform others. That said, let’s take a look at the 7 best e-commerce stocks to buy according to hedge funds.
Our Methodology
To compile the list of the 7 best e-commerce stocks to buy according to hedge funds, we looked at holdings of e-commerce ETFs and screened for Internet Retail companies on the Finviz stock screener. We sorted our screen by market cap and looked at the 20 largest e-commerce companies. We picked stocks that were the most widely held by institutional investors, as of Q2 2024. The list is in ascending order of the number of hedge fund holders for each stock.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close-up of a customer using the company’s e-commerce platform whilst shopping online.
PDD Holdings Inc. (NASDAQ:PDD)
Number of Hedge Fund Holders: 86
PDD Holdings Inc. (NASDAQ:PDD) is one of the best e-commerce stocks to buy according to hedge funds. The company is a multinational e-commerce group that owns Temu and Pinduoduo, two online retail sites, and holds a 20% market share in China’s e-commerce industry.
In the second quarter of 2024, PDD Holding’s total revenue reached RMB 97 billion, an 86% increase year-over-year. It also generated an operating profit of $4.5 billion, hinting that it is extremely profitable. Temu, its proprietary e-commerce platform, is rapidly growing in the United States and Europe. It sells all sorts of items such as clothing, home decor, beauty, and handmade items, at affordable prices.
Temu, known for its low-priced products and fast deliveries, is set to become one of the most used platforms in the world. Temu has a 20% market share in its home country and is rapidly expanding in Europe and North America, known as the fastest-growing e-commerce platform in the world. What sets Temu apart is its expenditure on advertising and marketing. PDD Holdings’ (NASDAQ:PDD) company ensures that its ad spending on social media garners reach and attention from customers globally.
The company has placed significant bets on its cross-border growth, which may have been in jeopardy due to geopolitical tensions at the moment. Conversely, as the Chinese government takes steps to stimulate the economy, PDD Holdings Inc. (NASDAQ:PDD) is expected to accelerate rapidly. Its growth strategy is also supported by its expansive advertising strategy and optimized operations.
Baron Emerging Markets Fund stated the following regarding PDD Holdings Inc. (NASDAQ:PDD) in its fourth quarter 2023 investor letter:
“We added to our digitization theme by building a position in PDD Holdings Inc. (NASDAQ:PDD), a leading Chinese e-commerce platform. Founded in 2015, the company has emerged as China’s second largest e-commerce player, capturing approximately 20% market share. In our view, PDD’s competitive moat lies in its team purchase model that facilitates bulk buying through direct partnerships with manufacturers, thereby eliminating intermediaries (e.g., distributors and middlemen) and lowering costs. Key factors driving the company’s meteoric growth include rising consumer demand for affordable products in China amid an economic slowdown, small-scale merchants seeking alternatives to Alibaba, and superior management execution. PDD’s revenue growth outpaces gross merchandize value growth owing to rising take rates as merchants aggressively compete for consumer traffic on the platform. In our view, PDD should continue to gain market share given its dominance in the value-for-money segment, growing affordable branded product offerings, and high operational efficiency. We believe the company’s growth will be further supported by the recent launch of its international e-commerce platform, Temu, which has become one of the fastest growing apps globally. Leveraging China’s excess manufacturing capacity, Temu has strong negotiating power with domestic suppliers and attracts global consumers with competitively priced products. Temu’s recent initiatives to improve unit economics, coupled with achieving variable breakeven in the sizable U.S. market, showcase management’s skill and commitment to sustained growth. We expect PDD to at least double its earnings and free cash flow in the next three years, with the potential for continued compounding thereafter.”
Overall PDD ranks 4th among the 7 best e-commerce stocks to buy according to hedge funds. While we acknowledge the potential of PDD as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than PDD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.