What You Need to Know About Why PDD Snuffed Out Investor Hopes

It is rare to see such a significant market adjustment for a large-cap company like this, especially considering that Pinduoduo has continued to be favored by many institutional investors due to its strong performance and growth potential.

Pinduoduo's Q2 performance is actually not too bad, with reported revenue of 97.1 billion yuan ($13.6 billion) for the June quarter. Although it slightly missed the average estimate of 100 billion yuan, the company still achieved a net income of 32 billion yuan, surpassing the projected 27.5 billion yuan.

It is the following statements that have raised concerns among investors.

"(We) are seeing many new challenges ahead, from changing consumer demand, intensifying competition and uncertainties in the global environment," Co-Chief Executive Chen Lei said on an earnings call with analysts after the results.

"Looking ahead, revenue growth will inevitably face pressure due to intensified competition and external challenges," said PDD's Vice President of Finance Jun Liu. “Profitability will also likely to be impacted as we continue to invest resolutely."

When asked about shareholder return, the management said: "In terms of shareholder returns, the company is still in the investment phase, and we are facing intense competition on different fronts as well as uncertainties from external factors. Therefore, our management team and I unanimously believe that it is not an appropriate time for share repurchases or dividends. We also do not see such a need in the foreseeable future."

The pessimistic business outlook in the above statements has indeed disappointed investors. However, what is even more critical is that for the first time, PDD has explicitly added the term "foreseeable future" to the statement regarding the absence of dividends and buybacks. For PDD, which has a strong balance sheet, such a statement will significantly reduce investor interest.

In a 2021 report released by the U.S. Chamber of Commerce, found that stock buybacks have an overlooked beneficial effect on stock liquidity (the ability for quick and low-impact transactions) and stock volatility (degree of price movement). Lewis and White’s research demonstrates that stock buybacks positively contribute to the welfare of all investors and stock transactions, not just the large shareholders.

Apple, one of the more prominent names embracing the idea, has conducted one of the largest buyback programs in corporate history.

In the past decade, Apple has spent $600 billion on buybacks, according to data compiled by Bloomberg, by far the most among US companies. Furthermore, the company's purchasing has remained consistent regardless of fluctuations in the stock market or economic cycles.

Goldman Sachs has given Pinduoduo a buy rating in its latest report, with a 12-month target price of $184. Goldman Sachs believes that Pinduoduo's stock performance has been poor this year, with a P/E ratio of less than 10, reflecting investor concerns about intensified domestic competition and geopolitical tensions. However, Pinduoduo's rapid growth in GMV and transaction services revenue exceeding expectations indicate sustained momentum with Temu. Pinduoduo remains one of the fastest-growing companies in China's internet sector in the second quarter, and its strategic investments will drive future growth.

Morgan Stanley analysts Eddy Wang and Kathy Zhu believe that PDD's second quarter online marketing service revenue growth miss indicates challenges in consumption and heightened competition. Despite management's pessimistic outlook on long-term profitability, the analysts feel it may be too conservative. Management's comments on the earnings call were concerning, as they highlighted shifting consumer demand towards rational consumption and increased competition domestically, as well as uncertainty internationally for Temu, leading to a slowdown in revenue growth in the second quarter of 2024.

Vey-Sern Ling, managing director at Union Bancaire Privee, expressed concerns about increasing domestic competition in the e-commerce market. With PDD planning to waive certain merchant fees and invest more in building a healthy ecosystem, other major players such as Alibaba, JD.com, ByteDance, Kuaishou, and Meituan are also expected to intensify their efforts to gain market share. Ling noted that e-commerce penetration is already saturated and consumption trends are decreasing, indicating a challenging landscape for companies in the sector.

Robert Lea, an analyst at Bloomberg Intelligence, pointed out that PDD's revenue miss underscores the growing difficulties in China's e-commerce industry, with increased competition and economic challenges expected to have a significant impact on companies like Alibaba, Kuaishou, and ByteDance. The already fragile state of China's e-commerce sector appears to be deteriorating at a faster rate, according to Lea's analysis.