Temu parent PDD Holdings stock drops on sharp profit decline

PDD Holdings (PDD) shares fell 17% after Q1 earnings missed expectations, with profit declining 47% to RMB14.74 billion (US$2.03 billion) despite a 10% revenue increase to RMB95.67 billion (US$13.3 billion), the slowest growth since early 2022. The profit decline was attributed to strategic investments and higher-than-expected sales and marketing expenses (RMB33.4 billion versus RMB29.5 billion forecast), while Jefferies maintained a 'Buy' rating, citing long-term potential despite short-term execution issues and a potential 31% upside, while flagging tariffs and international expansion as key areas to monitor.

Analysis

PDD Holdings Inc. (PDD) experienced a significant 17% decline in its US-listed shares, trading around $99, following the release of its first-quarter financial results which substantially missed market expectations. The company reported a 47% year-over-year drop in profit to RMB14.74 billion (US$2.03 billion), a sharp decrease from RMB28 billion in the corresponding period last year. Revenue, while up 10% year-over-year to approximately RMB95.67 billion (US$13.3 billion), marked the slowest quarterly growth rate since early 2022 and fell short of the Street's estimate of RMB102.5 billion. The profit disappointment was further underscored by non-GAAP net profit reaching RMB16.9 billion, significantly below the RMB27.9 billion consensus. This underperformance was attributed by co-CEO Lei Chen to strategic investments aimed at navigating "rapid changes in the external environment," an indirect reference to pressures from global tariffs, and was exacerbated by higher-than-expected sales and marketing expenses, which totaled RMB33.4 billion against a forecasted RMB29.5 billion. Furthermore, transaction services revenue grew only 6%, starkly underperforming the 26% growth anticipated, although online marketing services and other revenue grew 15%, slightly ahead of the 13.5% consensus. Despite these results, Jefferies analysts maintained a 'Buy' rating on PDD Holdings with a price target of $156, suggesting a 31% potential upside, emphasizing long-term potential over short-term execution challenges. However, Jefferies also highlighted several critical areas for ongoing scrutiny, including the potential impact of new tariffs on Temu, strategic decisions regarding international expansion, trends in online marketing take rates, and the necessity for sustained cost control.

Key Decisions for Investors

• Investors should approach PDD Holdings with caution in the near term, recognizing the significant Q1 profit decline of 47%, revenue growth slowdown, and the substantial 17% share price drop as indicative of current operational and external pressures.
• Despite the weak quarterly performance and negative market sentiment, Jefferies' reiterated 'Buy' rating and $156 price target suggest a potential divergence between short-term headwinds and long-term value; investors should critically assess this outlook against the reported execution issues.
• Closely monitor key risk factors including the impact of global tariffs on Temu, the efficacy and cost of international expansion efforts, evolving online marketing take rates, and the company's ability to manage its elevated sales and marketing expenditures to improve future profitability.