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What happened

Shares of PDD (NASDAQ: PDD) were up 16% as of 12:24 p.m. ET on Tuesday after the company reported better-than-expected earnings results for the second quarter.

Revenue grew 66% year over year to $7.2 billion, while adjusted net profit grew 42% to $2.1 billion. The quarter bolstered investors’ confidence in the economic recovery, sending the stock up from its recent slump.

So what

Co-CEO Jiazhen Zhao noted a “positive shift in consumer sentiment, leading to a rise in demand across various product sectors.” PDD benefited from sales promotions during the June 18 shopping festival. The company has been investing to deliver better savings and services to customers across its commerce platform.

The company’s key growth engine is Pinduoduo, which is benefiting from a focus on higher-quality agriculture production to bring better products to customers. It’s also a plus that the company is supporting increases in research and development expenses while also reporting a healthy profit.

The stock is selling at a much lower valuation than a few years ago, so as management continues to invest in the supply chain and drive higher revenue, the stock could have room to run.

Now what

The company’s high rate of profitable growth appears undervalued. The stock trades at a low forward price-to-earnings ratio of 21.6 relative to underlying business growth. That is lower than the average stock in the S&P 500, which trades at a P/E multiple of 25.

With China’s economy still recovering, PDD may not be performing up to its potential yet.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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