Intensifying competitive pressures and macroeconomic headwinds in China have impacted Pinduoduo (PDD, Financial), owner of discount eCommerce retailer Temu. Despite exceeding EPS expectations in Q2, PDD missed on revenue for the first time since 4Q22, with growth slowing to 86% from 131% last quarter. The stock is particularly affected by the negative commentary from PDD's executives.
- In the earnings press release, VP of Finance Jun Liu stated that "revenue growth will inevitably face pressure due to intensified competition and external challenges" and that "profitability will also likely be impacted as we continue to invest resolutely." Co-CEO Lei Chen also mentioned "many challenges ahead" and the company's preparedness to "accept short-term sacrifices and potential decline in profitability."
- These pressures are not only affecting PDD but also its rivals. On August 15, Alibaba (BABA, Financial) and JD.com (JD, Financial) posted lackluster Q2 results, with Alibaba missing revenue expectations and JD.com reporting its slowest revenue growth (+1.2%) in at least five years.
- Adding to the woes, Amazon (AMZN, Financial) is reportedly planning to add a new discount section on its site with direct shipping from China. On June 26, reports indicated that AMZN would begin offering products from Chinese merchants at lower prices, albeit with longer shipping times.
- Despite the challenging sales environment, PDD continues to invest heavily in its platform to fend off competitors. In Q2, operating expenses surged by 48% to RMB 30.8 billion, primarily due to increased spending on sales and marketing initiatives. Non-GAAP operating profit still rose by 139% year-over-year to RMB 14.6 billion, a slowdown from last quarter's 237% surge.
- Furthermore, PDD is facing heightened regulatory risks in both China and the U.S. China is clamping down on anti-competitive practices from tech companies, while the U.S. is increasing tariffs on Chinese imports.
The main takeaway is that PDD is dealing with multiple challenges and is not immune to the consumer spending slowdown, despite its focus on offering discounted products.
