Story Stocks^®

Intensifying competitive pressures and macroeconomic headwinds in China have weighed on Pinduoduo (PDD), the owner of discount eCommerce retailer Temu, and those issues took center stage again in Q2. While PDD exceeded EPS expectations, the company missed on the top-line for the first time since 4Q22 as revenue growth slowed to 86% from 131% last quarter. What's hitting the stock especially hard, though, is the gloomy commentary from PDD's executives.

• In the earnings press release, VP of Finance Jun Liu stated that "revenue growth will inevitably face pressure due to intensified competition and external challenges" and that "profitability will also likely be impacted as we continue to invest resolutely." Additionally, co-CEO Lei Chen commented that he sees "many challenges ahead" while the company is prepared to "accept short-term sacrifices and potential decline in profitability."
• These rising competitive and macroeconomic pressures are not only impacting PDD, but they're also having a profound effect across the eCommerce landscape in China. For instance, on August 15, rivals Alibaba (BABA) and JD.com (JD) posted lackluster Q2 results, including a revenue miss for the former and the slowest revenue growth (+1.2%) in at least five years for the latter.
• Unfortunately for PDD and its peers, there doesn't appear to be any relief in sight as eCommerce giant Amazon (AMZN) is reportedly planning to add a new discount section on its site with direct shipping from China. On June 26, The Information reported that AMZN would begin offering products from merchants in China at lower prices, but with longer shipping times.
• Despite the difficult sales environment, PDD has no intention of slowing its spending and investments to improve its platform and to fend off competitors. In Q2, operating expenses jumped by 48% to RMB 30.8 bln, mainly due to increased spending on sales and marketing initiatives. Non-GAAP operating profit still soared by 139% yr/yr to RMB 14.6 bln, but that does mark a significant slowdown from last quarter's 237% surge.
• If all of this wasn't enough for investors to worry about, PDD is also facing heightened regulatory risks in both China and the U.S. While China continues to clamp down on anti-competitive practices from tech companies, the U.S. is ramping up tariffs on Chinese imports.

The main takeaway is that PDD is taking hits from multiple sides and that it's not immune to the consumer spending slowdown, even though its platform is geared towards offering products at discounted prices.