Navigating PDD's Market Fluctuations: Financial Insights and Investment Strategies

On August 26, after PDD released its financial report, the market was on edge. The content of the conference call caused further declines. This article will analyze PDD's earnings report and subsequent strategies from three aspects to guide investment:

After the financial report was disclosed, the stock began to fall rapidly in pre-market trading, with a decline of about -12%. The market had differing opinions on the report. Some believed that such high growth should not lead to a decline, while others thought the growth rate was below expectations. At this stage, there was a split in opinions.

As the live broadcast of the earnings call began, the market continued to decline.

Analyzing the growth reflected in the earnings report and the conference call, we can understand:

(1) Growth Reflected in the Earnings Report: Non-GAAP profit was 34.43 billion yuan, up 12.5% quarter-over-quarter. Revenue in Q2 was 97.059 billion yuan, while it was 86.812 billion yuan in Q1 2024, with a quarter-over-quarter increase of 11.8%. Given that competitors like JD and Alibaba maintained relatively faster revenue and operating profit growth in Q2 2024, the market initially judged the performance as below expectations.

However, our judgment is that considering PDD’s current not-expensive valuation and its historically unprecedented growth rate, this is not a major issue.

The real shock to the market came from the expectations released during the conference call.

(2) Key Information from the Conference Call:

The following content is quoted from the conference call:

(a) "We are facing increasingly fierce competition. Competition has arrived and is expected to intensify in our industry. Our global business faces significant uncertainties from fierce competition and a changing external environment, which will inevitably cause fluctuations in our business. As shown by this quarter's results, high revenue growth is unsustainable, and a downward trend in profitability is inevitable. Finally, I believe the environment will evolve, and our company will continue to grow."

(b) "It is inappropriate to carry out capital-level buybacks or dividends at this time. We also see no need for this in the foreseeable future from our management."

This indicates that PDD is currently more focused on using funds for competition, without considering shareholder returns for now. However, capital market investments aim to earn: 1) the company's growth money; 2) shareholder returns from dividends/buybacks; and 3) valuation gains from monetary easing.

If the conference call mentions that competition is intensifying and there are no shareholder returns for now, this undoubtedly deals a severe blow to investor confidence. We need to look at the current competitive landscape.

Does this indicate that Alibaba and JD's low-price assault on PDD has achieved some effect? Let's explore this by comparing the Q2 financial data of each company.

Without a doubt, due to the weak macro consumption environment in the first half of the year, all e-commerce platforms inevitably experienced a slowdown in growth. Financial data shows that although Alibaba and JD have a tendency for marginal improvement, revenue growth has not seen a turning point. Alibaba's GMV increased, but the monetization rate was low. Core Taobao business GMV and order volume grew by mid-to-high single digits and double digits in Q2, but customer management revenue (CMR) only grew by 0.6%, still lagging behind even the low market expectations.

Figure: Alibaba Customer Management Revenue Growth (%)

Source: Bloomberg

However, several recent actions and strategic shifts by Alibaba are worth noting. Recently, Taobao has strengthened its commercialization process, including the full launch of "All-site Push," the introduction of some commission charges, and the official implementation of Taobao's new regulations in September, which will charge a basic software service fee of 0.6% per order. These new measures will become strong boosters for Alibaba's monetization rate. As these measures are implemented, it is expected that the growth rate of CMR will catch up with GMV growth, thereby improving the monetization rate in the second half of the year.

Over the past few quarters, JD has continuously strengthened its support for third-party merchants. In Q2, commission and advertising business revenue was 23.4 billion yuan, up 4% year-over-year, exceeding market expectations, mainly thanks to advertising revenue growth (double-digit growth) driving the growth of service revenue. The third-party merchant strategy has achieved some results.

Figure: JD Marketplace and Advertising Revenue Growth (%)

Source: Bloomberg

However, JD's self-operated retail business saw near-zero year-over-year growth in Q2. Although market expectations were already low, it was still 0.4% below expectations. The 3P (third-party) business grew, but mainly as a supplement to the range of products. The core self-operated 1P (first-party) business remains JD's foundation, and the strong past performance of electrical goods has inevitably been affected by adjustments in the real estate chain and consumption downgrades. The business inflection point has not yet arrived.

For niche leaders outside, the three giants, such as VIPShop, Q2 saw a loss of users and order volume, with the decline expanding. Management explained very clearly, "The loss of users and order volume this season is mainly due to higher subsidies from other platforms, leading to user attrition."

In the current overall sluggish e-commerce industry and the intense competitive environment among large enterprises, the market growth space is already very limited. After the market is divided among the industry giants, niche market leaders like VIPShop face significant growth pressure.

In terms of growth rate, live e-commerce platforms still grow faster than comprehensive e-commerce, but the gap between the two is significantly narrowing. At the company level, the growth rate of the two previously leading live e-commerce platforms has also significantly slowed this quarter (Kuaishou GMV growth was only 15%, and it is rumored that Douyin's growth rate has also significantly declined in the past two months).

This indicates that the momentum of live e-commerce is leveling off, and as live e-commerce develops into a shelf mode, it ultimately needs to return to the fundamentals of the e-commerce industry, such as price, logistics, and service. The trend is shifting towards shelf e-commerce.

From the current competitive environment, since 2024, Douyin, Alibaba, and JD have indeed been using low prices to besiege PDD's stronghold, with strategies like "only refunds" and "all-site push" being launched successively. Essentially, the substitutability among the various e-commerce platforms is high, and consumers remain in a state of flux.

From the Q2 performance, Alibaba and JD's domestic e-commerce revenue growth remains weak. However, it is undeniable that their various measures have led to marginal improvements in their appeal to merchants and users. In an increasingly competitive and consumption-slowing environment, PDD's previously high monetization rate is unsustainable and requires some support for merchants to achieve healthy platform development.

Firstly, we can determine that the competition among e-commerce companies remains fierce. PDD intends to continue to intensify the competition and, compared to its peers, does not plan to provide shareholder returns. For existing shareholders, if they simply want to "break even," they can carry out forward covered calls near the cost price. For instance, if they are stuck at $140 per share, they can sell forward call options with an exercise price of $140 per share. Considering the management's pessimistic expectations, we can refer to the historical release time of the third-quarter report, which is usually at the end of November, and sell call options before the next financial report.

The risk lies in the possibility that PDD's management may clarify that they will still provide shareholder returns in the future. In this case, the stock price is expected to rise rapidly, causing the shares to be sold near the cost price.

Secondly, if one is willing to accept the approach of PDD's management, the current valuation is not expensive and is still considered quite cheap overall. Whether it is buying and holding or selling put options to gradually wait for the bottom, both are good choices.

Our judgment is that if, as the management stated, "the overall direction of gradually declining profits is inevitable," then the difficulty of investing in PDD will increase sharply. However, if it is merely a slip of the tongue by the management and the so-called "gradual decline in profits" refers only to the profit margin rather than the absolute net profit and cash flow generated, then with PDD's financial performance in the future, the stock price will continue to rise.

Under the aforementioned uncertainties, we find that even the most powerful companies have stock price fluctuations that are very uncontrollable. Investors can appropriately diversify and invest in a portfolio, and use options strategies to protect their positions or earn returns during the holding period. Only in this way can they capture the "fish" in the saying "the greater the wind and waves, the more expensive the fish."