Pinduoduo's management's remarks caused the largest drop in stock price since its listing. The teleconference has sparked hot discussions on Wall Street.

Morgan Stanley believes that the comments on the long-term profit decline are too negative; Citigroup suggests that it may be to manage investor expectations; Goldman Sachs still bullish on the long-term growth prospects of pdd holdings, while Bernstein believes that healthy and sustainable growth is actually a 'good thing'.

Pinduoduo released its Q2 financial report this week, with a year-on-year revenue growth rate of 86%, getting even closer to the 100 billion mark. However, it fell short of market expectations, and the growth in online market service revenue also did not meet expectations.

The remarks made by the management during the subsequent teleconference have shocked the market. Firstly, the warning that the profit growth will slow down due to intensified competition, and the expectation that future revenue growth will slow down and sacrifice short-term profits, and the long-term profit-earning ability may decline; secondly, no dividends or share buybacks will be conducted in the future, as Pinduoduo is still in the investment phase.

What does this 'self-exploding' statement convey?

Morgan Stanley: The comment on the decline in long-term profit-earning ability is too extreme.

Morgan Stanley stated that Pinduoduo's Q2 growth in online market service revenue fell short of expectations, indicating weak consumer demand and intensified competition. However, we believe that the management's comment on the decline in long-term profit-earning ability is too extreme.

The tone of the management team on the earnings conference call was unexpectedly negative. The management team stated that the domestic business is facing changes in consumer demand (increased emphasis on rational consumption) and intensified competition, while Temu is facing uncertainty internationally, resulting in a slowdown in revenue growth starting from the second quarter of 2024.

PDD Holdings plans to increase its investment in high-quality merchants by waiving 10 billion yuan in merchant fees over the next 12 months. It is expected that profitability will start to decline from the third quarter of 2024, and regardless of any short-term rebound, the long-term decline in profitability is inevitable.

We believe that the management team's guidance is too pessimistic. PDD Holdings is still the fastest-growing company among all e-commerce companies in China, and we expect this growth to continue to bring operational leverage and improve long-term profitability.

However, Goldman Sachs has aggressively lowered its target price and revenue expectations:

The target price has been lowered from $220 to $150, maintaining a 'buy' rating with a projected PE ratio of 13x for 2025. PDD Holdings is the only e-commerce company that will surpass industry growth, so its valuation should be higher than Alibaba's 9x and JD.com's 7x.

The GAAP diluted EPS expectations for 2024, 2025, and 2026 have been lowered by 8%, 16%, and 22%, respectively, to reflect increased investment.

Citi: Contradictory remarks, playing with 'expectation management'?

Citi believes that the management's information is somewhat contradictory. They may wish to manage competition and investor expectations in a 'low-profile' manner. Due to limited investor communication, lack of operational indicators and financial details disclosure, and the management's proactive cautious outlook comments, the stock price may remain volatile until PDD Holdings delivers several quarters of better-than-expected performance to regain market confidence.

In the opening remarks, the management stated, "The consumer experience and service continue to improve, and the number of new merchants and products has significantly increased," and also pointed out that "the number of new merchants and new product supplies has achieved meaningful growth."

We have seen contradictory information. If the platform can attract more and more new merchants, and the number of products has significantly increased, and all the growth has brought "stable" performance in the second quarter, then why did the company suddenly point out that competition has further intensified and consumer demand has changed?

Although almost all internet companies in the past few quarters have commented on the weak macro economy and how it affects consumer sentiment, PDD provides a more optimistic outlook on the macro economy and consumer spending.

Therefore, we question whether the "change in consumer demand" is only recent. If they can attract enough new merchants, why would they suddenly say this quarter that they will "commit significant resources to support innovative and quality-oriented merchants and provide significant transaction fee reductions"?

Due to intensified competition, changes in consumer behavior, and uncertainty in the external environment, Citigroup has lowered its target price from $194 to $120 and adjusted the 2025 expected PE ratio from 12x to 9x. More importantly, despite having $39 billion in net cash, the management still refuses any shareholder return plan, and Citigroup has downgraded the rating from buy to neutral/hold.

In terms of financial performance expectations, given the cautious and more pessimistic tone of the management, Citigroup has revised down the full-year revenue/non-GAAP net income forecasts for 2024 to 2026, reducing them by 6.5%/2.4%, 11.6%/17%, and 13.5%/19.8% respectively. Citigroup predicts that full-year revenue in 2024 will increase by 58% YoY to 390.9 billion RMB and non-GAAP net income will be 136.4 billion with a profit margin of 35%.

Goldman Sachs: Bullish on PDD's long-term growth prospects

Goldman Sachs previously supported PDD and in its latest report, it lowered its target price but still has a positive outlook on its long-term growth prospects.

We have reevaluated the investor debate regarding the progress of our domestic operations and Temu investment, and due to the slowing growth of online marketing revenue, we have lowered our revenue forecast for 2024-2026 by 4-5% and our net profit forecast by 12-14%.

Therefore, we have reduced our 12-month target price from $184 to $165, with a valuation of 13 times for our domestic PDD Holdings business.

With PDD Holdings' P/E ratio further declining to 8 times, we believe the risk-reward ratio becomes more attractive. Considering the expected P/E ratio of 5 times in 2024, we think PDD Holdings still has a positive long-term growth outlook.

We continue to be bullish on PDD Holdings, based on its advertising technology capabilities (ROI-based marketing tools) and China's cost-competitive suppliers/merchants/supply chain, along with a favorable risk-reward ratio and the current market cap not yet including the valuation of Temu.

Bernstein: Healthy and sustainable growth is actually a good thing.

Bernstein is the most optimistic, believing that healthy and sustainable growth is actually a good thing and helps PDD Holdings further compete for market share:

Isn't healthy and sustainable growth a good thing? Is the company's communication not just for investors? A platform that is more friendly to merchants, invests in supply-side quality, should become stronger and better at taking market share from peers. Even with the reduced guidance, PDD Holdings' stock is currently trading at a P/E ratio of approximately 7 times the expected 2025, lower than Alibaba and JD.com, where the valuation multiple reflects concerns about market share loss and non-growth.

This conference call, even by PDD Holdings' standards, is highly unconventional. However, with rational thinking, by sacrificing short-term profit in order to improve relations with merchants, increase the variety and quality of products on the platform, and enhance compliance both domestically and internationally, PDD Holdings should become a stronger competitor and drive higher growth under otherwise similar conditions.

The company's increased investment and giving up 10 billion yuan of merchant transaction fees will have only a minimal impact on the company's future profitability. Unless the domestic monetization rate actively and continuously decreases, it feels difficult to understand the large-scale incremental investment required to truly decrease the company's profit.