Pinduoduo Faces Headwinds Despite Strong Growth

Investing.com — Pinduoduo (NASDAQ:PDD) is contending with challenges despite its robust growth. The parent company of online marketplace Temu is set to ramp up spending to combat rising competition, which could obscure earnings growth prospects, according to analysts at Macquarie in a Tuesday note.

Macquarie has downgraded Pinduoduo from outperform to neutral and reduced its price target from $220 to $126.

“While domestic share gains are sustained, we believe PDD is now pushing for accelerated branding efforts to ensure ecosystem quality,” Macquarie analysts stated.

Pinduoduo’s management indicated intentions to increase investments to support high-quality merchants willing to innovate. These merchants will also receive significant transaction fee reductions.

However, the elevated marketing expenditures may lead to higher merchant rebates and marketing costs, potentially affecting profitability. Macquarie adjusted its growth forecast for the company, cutting its 2024E P/E multiple in half to 10x, aligning it with other domestic e-commerce competitors.

Analysts at Citi expressed similar concerns about increasing competition and pointed out conflicting messages from management during the earnings call following Pinduoduo’s quarterly results.

The company noted a growing number of merchants and products, contributing to a solid Q2 report. However, management also raised alarm about escalating competition and changing consumer demand.

“If the platform has been able to attract a growing number of new merchants and the number of products grew significantly… then why would the company suddenly note that competition is further intensifying?” Citi asked.

PDD’s Temu platform is facing heightened competition from rivals like Alibaba Group Holdings Ltd and JD.com Inc, which offer competitive low-price products that may be of higher quality than those sold on PDD.

The cautious outlook from PDD’s management overshadowed Q2 results, which exceeded Wall Street expectations, driven by a surge in transaction services revenue from Temu.

While the shift in focus towards enhancing ecosystem quality and merchant support is expected to incur substantial costs, PDD’s net cash balance of $39 billion indicates that they have the resources to invest without compromising financial stability.

Macquarie suggests that increased investment cycles and potential earnings instability may prompt more cautious valuations, though PDD’s strong cash position and continued domestic market share gains could provide a degree of stability.