Temu parent is using coupons, lower fees to eat some costs of Trump's tariffs

PDD Holdings (PDD) shares tumbled 15.1% after Q1 earnings significantly missed expectations, with net income down 47% to RMB14.7 billion ($2.03 billion) and revenue up 10% to RMB95.7 billion, also below forecasts. The company is investing heavily in coupons and merchant support programs (RMB100 billion and RMB10 billion respectively) to mitigate the impact of tariffs and increased competition, particularly given Temu's third-party marketplace model, with some price support coming from Chinese government subsidies.

Analysis

PDD Holdings Inc. experienced a significant 15.1% intraday stock decline, on track for its largest one-day selloff since a record 28.5% plunge on August 26, 2024, following a substantial first-quarter earnings miss. Net income plummeted 47% year-over-year to RMB14.7 billion ($2.03 billion), falling markedly short of the RMB25.9 billion analyst consensus and representing the most substantial bottom-line miss in four years. Concurrently, revenue grew 10% to RMB95.7 billion, also failing to meet expectations of RMB103.1 billion. PDD attributed these underperforming results to considerable investments designed to shield merchants and consumers from tariff impacts and to counter escalating competition, which particularly pressures its Temu third-party marketplace model. These strategic expenditures involve a RMB100 billion ($13.7 billion) merchant support program and an RMB10 billion ($1.4 billion) consumer coupon initiative, with some pricing support also derived from China's National Subsidy Program. This government-backed approach to tariff mitigation contrasts with companies like Walmart Inc., which face pressure to absorb tariff costs or pass them to consumers. PDD's management believes these investments are vital for the long-term outlook of its merchants, whom they perceive as having a 'clear disadvantage' against competitors with first-party business models. Despite this quarterly setback, PDD’s stock has recorded a 4.3% gain in 2025, underperforming the iShares MSCI China ETF's rally of over 15% but outperforming the S&P 500 index's 0.5% increase.

Key Decisions for Investors

• Investors should closely scrutinize PDD's upcoming quarterly results for evidence that the substantial investments in merchant support and consumer subsidies are effectively mitigating tariff impacts and competitive pressures without excessively eroding profitability.
• Evaluate the long-term sustainability of PDD's current strategy, considering its dependence on government subsidies and the potential impact of persistent trade tensions or heightened competition on its financial health.
• Given the sharp stock reaction and significant earnings miss, a cautious stance may be warranted in the short term, focusing on how these strategic initiatives translate into market share stability and an eventual path to margin recovery before adjusting investment positions.