NEWS WRAP: Temu Parent PDD's Shares Plummet After Worrisome Results

By Teri Yu

Shares of PDD Holdings Inc. PDD plunged nearly 30% on Monday after the parent of e-commerce sensation Temu said it may need to sacrifice near-term profits to remain competitive. The drop was the biggest single-day decline since the company’s 2018 IPO, wiping out more than $50 billion in market value and causing the company to lose its spot as China’s most valuable e-commerce company.

Investors were spooked after the company warned in its second-quarter results of intense competition and external challenges ahead that would impact its future growth and profits.

Fast-rising PDD recently became the world’s second most valuable e-commerce company, trailing only Amazon and surpassing domestic rival Alibaba BABA in market value in May. Western investors were particularly impressed by the rapid rise of its low-cost Temu international marketplace. But after the Monday selloff, PDD’s market value dropped to $194 billion, slightly behind the $199 billion for Alibaba.

Nonetheless, PDD’s latest results showed it is still growing quickly. Its revenue in the second quarter jumped 86% year-on-year to 97.1 billion yuan ($13.4 billion), driven by growth in both its online marketing and transaction services. Revenue from its transaction services soared 234% to 47.9 billion yuan year-on-year.

While the revenue growth was impressive, it’s worth noting the rate marked a slowdown from the previous quarter’s 131% increase, which may have heightened market concerns. The company’s second-quarter non-GAAP net profit reached 34.4 billion yuan, up 125% from 15.3 billion yuan in the year-ago period.

Chairman and Co-CEO Chen Lei said the company is seeing many challenges ahead and is prepared “to accept short-term sacrifices and potential decline in profitability.”  Vice President of Finance Liu Jun also warned of a slowdown: “Looking ahead, revenue growth will inevitably face pressure due to intensified competition and external challenges,” he said.

PDD said that in response to competition and changing consumer preferences, the company will enter a new investment phase to enhance its supply chain efficiency and initiate more support and incentives for quality merchants. New steps include waiving or significantly reducing their transaction fees, with an initial target of 10 billion yuan in such reductions during the first year. The company emphasised that such investment will weigh on its profit from the next quarter onward but will benefit its platforms over the longer term.

PDD does not give separate financials for Temu, which now operates in more than 70 markets.  But management warned that macro uncertainties will impact both revenue and profitability of its global business.

Founded in 2015, PDD has ascended to the top of China’s fiercely competitive e-commerce sector largely on the huge popularity of its low prices and group-buying features that integrate with the country’s ubiquitous WeChat social network. The model resonates especially well with price-sensitive consumers in China’s smaller cities who like purchasing the service’s highly discounted items with family and friends. Its success has prompted older rivals Alibaba and JD.com to reshape their strategy to address weakening consumer sentiment as China’s economy slows.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.