Shares of the Temu-parent PDD are cheap, but could be risky. A way to play it using options

Published Wed, Apr 10 202410:49 AM EDT

Online retailer sensation Temu, owned by PDD Holdings , competes with Amazon and Walmart on price and FedEx's recent earnings confirm that this strategy is starting to pay dividends. I'll review a lower risk way to get long PDD. A few weeks ago, FedEx reported a better-than-expected profit, showing both the resilience and uptick in shipping volumes for 2024. Those results reflect resilient sales for Temu, I believe. Also note that PDD was in the green during a tough day for the overall stock market on Wednesday Despite slower shipping times, Temu offers pricing that is substantially lower and looks to continue growing its market share globally. After breaking out above $113 resistance level in November of last year, PDD gapped higher but has recently pulled back to this important support level. This provides a favorable entry point from a risk/reward ratio. A break below $109 would suggest that our thesis is incorrect, but the upside is well into the $140's as our initial upside target. With lofty analyst expectations of over 50% annual revenue growth and 25%-plus EPS growth, PDD is downright cheap at only 13 times forward earnings. Despite the elevated growth rate, PDD remains very profitable with strong operating margins and FCF generation. This significantly reduces the downside risk of long exposure and aligns the technicals with strong fundamentals. The trade Implied volatility on PDD is extremely high, which typically would favor options selling. However, I believe that the risk/reward is there for options buyers by using a vertical spread. PDD 1Y mountain PDD, 1-year Let's go out to June and buy the $120/$145 call vertical for a $8.10 debit. This entails: Buy June $120 Call @ $11.30 Sell June $145 Call @ $3.20 This strategy would risk a total of $810 per contract if PDD is below $120 at expiration, while potentially profiting more than double that of $1690 per contract if PDD is above $145 at expiration. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.