PDD earnings fail to impress; Is the stock oversold?
2min read Thursday morning, Pinduoduo (PDD) reported its Q3 results, missing both earnings and revenue estimates, which sent its stock down sharply by nearly 11%. Adjusted EPS increased over 60% year-over-year but fell significantly short of analyst expectations, marking one of the company’s largest misses in years. Revenue grew 44.3% year-over-year to RMB 99.35 billion but fell short of the RMB 102.87 billion consensus. This represents a marked slowdown from the 76% growth recorded in Q2, highlighting challenges amid intensifying competition, economic headwinds, and geopolitical risks.
Shares of PDD slipped below the $100-psyche level in reaction to the news. The stock is down nearly 40% since October 7. Its RSI stands at 27 suggesting the stock is near-term oversold. This makes for an enticing "bounce play" for traders but longer-term investors may want to wait for more evidence of a turnaround.
The company's strategy has centered on aggressive investments in merchant fee reductions, customer retention, and international expansion via its subsidiary, Temu. Management reiterated its commitment to long-term investments despite near-term profitability pressures, allocating over $1 billion toward fee reductions, including refunds on service fees and lower security deposits for merchants. However, these efforts are colliding with weaker consumer sentiment in China, driven by high youth unemployment and a property sector crisis, which has impacted discretionary spending and confidence.
PDD's earnings call highlighted external challenges, including a slowdown in China's e-commerce market, heightened competition, and regulatory headwinds. While government stimulus measures, such as interest rate cuts and reduced reserve ratios, have provided some relief, PDD acknowledged its operational limitations in fully capitalizing on these opportunities. Co-CEO Zhao Jiazhen admitted the company missed chances to leverage these policies effectively, pointing to inefficiencies in its supply chain and increased fulfillment and payment processing costs.
Internationally, PDD is grappling with geopolitical risks, particularly in the U.S., where its Temu platform faces potential tariff increases under the incoming administration. U.S. legislators have targeted Temu and other Chinese platforms like Shein with scrutiny over pricing practices and regulatory compliance. Temu has also been shifting its advertising budget away from the U.S. to mitigate geopolitical risks, while expanding in other regions. However, growth outside the U.S. has not fully offset slowing U.S. downloads, which have declined since their peak in mid-2023.
Competition remains fierce in both domestic and international markets. PDD's low-cost offerings have pressured rivals Alibaba and JD.com but at the cost of sparking a broader price war, compressing margins across the industry. Reports of protests from Temu suppliers over perceived unfair practices and heightened regulatory scrutiny in Europe, including investigations into illegal product sales, further complicate PDD’s operational landscape.
JP Morgan downgraded the stock to "neutral," citing limited visibility on near-term financials, but noted that PDD could continue gaining market share in China's e-commerce market through its cost leadership strategy. Morgan Stanley warned that higher U.S. tariffs could erode Temu's price advantage against domestic competitors like Amazon, adding another layer of uncertainty.
From a strategic standpoint, PDD’s focus on personalization and expanding into first- and second-tier Chinese cities reflects an effort to diversify its revenue base. By encouraging merchants to innovate and meet evolving consumer demands, the company aims to build loyalty among price-sensitive shoppers. However, these initiatives have yet to deliver a meaningful uptick in demand, as evidenced by two consecutive quarters of revenue misses.
In summary, PDD's Q3 results underscore the challenges of executing a growth-oriented strategy in a slowing economic environment with intensifying competition and geopolitical risks. While the company's investments in merchant support and compliance align with its long-term vision, the immediate impact on profitability and growth remains a concern. Management's candid acknowledgment of operational limitations and commitment to resolving inefficiencies suggest a willingness to adapt, but PDD’s ability to balance long-term growth with near-term profitability will be critical to rebuilding investor confidence.