PDD’s Q1 results next week may be next catalyst: Morgan Stanley

Morgan Stanley anticipates PDD Holdings' Q1 2025 earnings, due May 27, will be a key catalyst for its stock price, hinging on online marketing services (OMS) revenue growth and profitability. The firm projects OMS revenue to increase 11% year-over-year and non-GAAP net profit to reach 28 billion yuan, driven by domestic market share gains exceeding overall industry GMV growth; however, increased merchant subsidies may pressure OMS revenue growth. Morgan Stanley's base case forecasts a modest share price increase, while stronger results could yield a 5-15% gain, and weaker figures could result in a greater than 10% decline.

Analysis

PDD Holdings' forthcoming first-quarter 2025 earnings, anticipated on May 27, are positioned by Morgan Stanley as a pivotal catalyst for its share price, contingent on the performance of its online marketing services (OMS) revenue and overall profitability. Morgan Stanley projects an 11% year-over-year increase in OMS revenue, which implies an 18% growth in Gross Merchandise Volume (GMV), and a non-GAAP net profit of 28 billion yuan. This outlook is supported by expectations of PDD continuing to capture domestic market share, with its GMV growth forecast to surpass the broader industry's 6% expansion. However, a potential headwind identified is that OMS revenue growth may lag GMV growth due to increased subsidies extended to merchants, leading to a lower take rate. Morgan Stanley has outlined a base case scenario, with a 60% probability, foreseeing OMS revenue growth between 11-14% and profit of 27-28 billion yuan, which would likely result in a modest 0-5% share price appreciation. A more bullish outcome, characterized by stronger revenue and profit up to 30 billion yuan, could drive a 5-15% share increase, while weaker performance could trigger a decline exceeding 10%. Despite pressures from a high year-ago earnings comparison and increased subsidies, Morgan Stanley suggests these could be partially mitigated by reduced spending in Temu US. The article also notes a general investor caution due to elevated market valuations in 2024, underscoring the significance of company-specific catalysts like PDD's earnings. The overall sentiment surrounding this news is moderately positive, with a specific positive sentiment for PDD.

Key Decisions for Investors

• Investors should closely monitor PDD's Q1 OMS revenue growth and non-GAAP net profit figures relative to Morgan Stanley's base case (11-14% OMS growth, 27-28 billion yuan profit) as key indicators for near-term share price movement.
• Consider the potential for share price volatility post-earnings, with Morgan Stanley's scenarios suggesting a 0-5% upside in the base case, a 5-15% gain in a bullish outcome, and a potential decline of over 10% if results disappoint.
• Evaluate the sustainability of GMV growth in light of increased merchant subsidies and its impact on the OMS take rate and overall profitability, and watch for commentary on spending trends for Temu US as a potential offset to margin pressures.