PDD Group delivered another shock to the market in its Q1 2025 earnings, announced on Tuesday (27 May). Revenue growth was significantly behind market consensus, and operating profit dropped almost 40%.
PDD’s share price closed nearly 17% in the two trading days after the announcement.
As Temu’s parent company does not really communicate with the market like listed tech companies do (it doesn’t even have a CFO), the quarterly announcement and the ensuing earnings call are pretty much the only opportunities for many to gain an understanding of the company’s performance and plans.
What happened this time? Has it lost steam? Will the ‘Temu threat’ for other ecommerce players and retailers dissipate?
A few thoughts:
1. There are two big areas of worry for PDD’s prospects:
a. fierce competition in China’s domestic market and the setback Temu faces in the new US tariff regime. Let’s unpack each of them:
2. Competition in China:
a. the key driver for dropping revenue and profit has been the subsidies (智能优惠券 “smart vouchers”) Pinduoduo has been offering to both consumers and businesses;
b. These subsidies are automated, and accounted in two ways: merchant subsidies as contra revenue (hence reduced net revenue), while consumer subsidies as sales & marketing costs (hence reduced profits);
c. The scale was massive – the S&M costs alone grew close to RMB10 billion YoY; and revenue growth missed market consensus by almost RMB 6 billion;
d. Overall, Pinduoduo’s GMV still grew faster than the macro market. The question is whether that cost of subsidies is worth it;
3. The state subsidies on consumer electronics:
a. You probably still remember co-CEO Chen Lei’s comments in Q2 2024 earnings which sent PDD share prices down by ~30%. There was a lot of speculation about why he would say that (including deliberating depressing share price so that founder Colin Huang would not become the richest man in China);
b. Retrospectively, you would realize that Chen Lei was just … being candid. The other Co-CEO, Zhao Jiazhen, mentioned specifically in Q3 2024 earnings call “our team’s gradual ageing and lack of certain capabilities might cause us to miss out on some macro opportunities”. He was referring to the State subsidies on consumer electronics;
c. Government of China announced these subsidies in August 2024, funding up to RMB2000 per item on consumer purchases on various appliances, and subsequently expanded to mobile phones and other digital devices;
d. The replacement subsidies were co-founded by the central and local governments. Online retailer JD, with its own warehouses and direct relationships with brands could easily tap into the subsidies – while Pinduoduo, where branded goods are sold by distributors and resellers, was not able to catch;
e. Such subsidies would obviously direct consumers away from Pinduoduo. Hence Pinduoduo started paying its own subsidies to keep the market share (and DAU);
4. Temu/global markets:
a. Temu is indeed facing significant challenges with its US business. Non cross border are now the majority of Temu orders – overall GMV in the US market has dropped;
b. The full blown effects of the removal of de minimis rule (effective 2 May) will only be shown in Q2 – although Temu’s preparations to deal with it has been happening for a while;
c. The potential European tax (up to €2 per item) on cross border ecommerce can drive costs significantly up as well;
d. Temu has redistributed their investments (marketing etc.) into other markets. It is topping the Google play store charts in all Southeast Asian markets it operates in, and is giving logistic service providers aggressive targets;
e. Temu itself is an audacious but calculated undertaking – one that involves a clear path but extreme difficulties in execution. A close friend in the industry once told us: “I don’t know whether they will succeed. But if anyone can ever crack this, that anyone would be PDD”;
5. How will the (near) future be like:
a. The subsidies will last a few more quarters, which means that PDD’s revenue and profit growth might still be depressed for a while.
b. Pinduoduo or Temu aside. The bigger question is how PDD will deploy its US$61 billion liquid assets when macro growth is limited:
6. Is PDD entering food delivery & quick commerce?
a. There are on the ground rumors that PDD is considering to enter food delivery and quick commerce.
b. This is probably because that with JD’s DAU ticking up after entering food delivery, PDD needs to at least evaluate this potential seriously;
c. It does not mean it will. But PDD has managed to beat Meituan in community groupbuy – it also has a workforce from that venture to be readily deployed if they were to enter food delivery.
7. “Not a conventional company”:
a. Co-CEOs kept mentioning that PDD is “not a conventional company”. To understand this, I would encourage you to read founder Colin Huang’s 1st letter to shareholders in 2018. Also note that his philosophy is deeply influenced by Warren Buffett.
b. Our advice is still: do not underestimate PDD.
The post What is behind PDD’s big earnings miss first appeared on The Low Down - Momentum Works.
