pdd holdings stock price plunged 28%! Is the management 'self-shorting'? (2024.08.28)

Hello everyone, in this week's Technical Tracking, let's analyze the new force of China's e-commerce that temporarily surpassed Alibaba's market capitalization - $PDD Holdings(PDD.US)$

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Hot events

On August 26, 2024 (Monday), PDD Holdings' stock price plummeted more than 28%, marking the largest single-day decline since its listing in 2018!

The trigger for the stock price plunge was due to the company's second-quarter revenue falling short of market expectations, coupled with management's statement that they will sacrifice short-term profit for long-term growth and give up cash dividends or share buybacks in the coming years.

According to the financial report, PDD Holdings' second-quarter revenue was 97.06 billion yuan (approximately 13.6 billion US dollars), a year-on-year growth of 86%. Analysts expected revenue to be 100 billion yuan, according to LSEG data. Meanwhile, PDD Holdings' second-quarter net income increased by 144% year-on-year, reaching 32.01 billion yuan.

In a seemingly optimistic situation, what caught investors off guard is the pessimistic tone expressed by PDD Holdings' chairman and co-CEO Chen Lei in the announcement, which was interpreted by the market as the management's "self-shorting". He said: Although we have made solid progress in the past few quarters, we also see many challenges in the future; we will invest heavily in platform trust and security, support high-quality merchants, and continuously improve the merchant ecosystem; We are ready to make sacrifices in the short term and may face a decline in profits.

After the release of the financial report, Wall Street investment banks have adjusted their views on PDD Holdings. Morgan Stanley downgraded the stock to "neutral" due to the deterioration of its financial visibility. Citi also downgraded the rating of PDD Holdings from "buy/high risk" to "neutral/high risk" for reasons including limited communication with investors, lack of operational indicators and detailed financial disclosure, and seemingly deliberate conservative outlook from management.

On the other hand, some institutions remain optimistic. For example, JPMorgan pointed out that although PDD Holdings' financial condition is expected to worsen due to large investments, considering the continuous increase in its market share in China and the potential for its overseas e-commerce platform, Temu, to turn losses into profits, it is believed that PDD Holdings' profit growth in the next few quarters will not deviate from double digits.

Technical analysis

Trend analysis:

The weekly chart shows that since March 2022, PDD Holdings' stock price has been running within an ascending channel. Over the past two years, the stock price has risen by nearly 400% from a low point. However, with the stock price falling more than 28% in a single day on August 26th, this ascending channel has been broken, indicating an increased possibility of a trend reversal downwards.

Investors can further understand the overall trend changes through Fibonacci retracement lines (golden ratio lines). On the weekly chart, connecting the high of the past two years at $164.69 and the low at $23.21 can deploy Fibonacci retracement lines. It can be seen that the current pullback of PDD Holdings' stock price has exceeded 50%, but has not yet reached 61.8%. Some experienced investors may believe that once the pullback exceeds 61.8% ($77), it indicates a trend reversal rather than a temporary adjustment.

Indicator interpretation:

• PDD Holdings' stock price is currently clearly deviating from key moving averages, including the 50-day moving average (MA50) and the 200-day moving average (MA200), highlighting the bearish sentiment in the market after the second-quarter performance release, as investors have sold off shares on a large scale.

• Over the past four trading days, pdd holdings' stock price has fallen by more than 4% each day. At the same time, the volume has been showing an increasing trend, indicating extreme market panic. Despite a 28% single-day plunge in the stock price, the selling pressure remains significant.

• In the short term, the stock has reached a certain level of oversold conditions, such as the 14-day RSI indicator dropping below the 30 oversold boundary for three consecutive trading days. However, this does not guarantee a short-term stabilization and rebound in the stock price.

Areas of Focus

pdd holdings' stock price is currently at a 52-week low. Despite a certain degree of oversold conditions in the market, there are no clear signs of stabilization and rebound on the daily chart yet. If the stock price continues to decline, investors can focus on the Fibonacci retracement line on the weekly chart, where there might be some support around the 61.8% retracement level (around $80). However, if the stock price falls below this key level, bullish confidence may be significantly affected, and there is a greater chance of a downward reversal in the medium to long term.

This content discusses technical analysis. Other methods, including fundamental analysis, may provide different perspectives. The examples provided are for illustrative purposes only and do not reflect expected results.

All investment involves risk, including the potential loss of principal, and no investment strategy can guarantee success.