Why PDD Holding, the owner of Temu, fell 32.1% this week

Actions of PDD Holdings (PDD 2.27%)which owns popular online marketplace Temu, fell as much as 32.9 percent in trading this week, according to data from S&P Global Market Intelligence. The company reported earnings that showed a staggering 86% increase in revenue, but the biggest news was that management said the focus would be on growth, not profit, going forward.

PDD priorities

Revenue in the second quarter of 2024 rose 86% to $13.6 billion, and operating profit rose 156% to $4.48 billion.

While the results were impressive, co-CEO Jiazhen Zhao said in the earnings statement, “We are committed to making the transition to high-quality development and promoting a sustainable ecosystem.” He went on to say that there will be short-term sacrifices and profitability could decline as a result of these investments.

Temu’s new direction

PDD’s growth was led by Temu, and the site became synonymous with low-cost, low-quality products. But Temu wants to make a transition from the lower end of retail to a higher end market.

It’s not clear that it will be successful, given the brand the company has already built. And now U.S. online retailers are trying to copy the company’s marketplace, allowing retailers to sell and ship directly from overseas, avoiding many of the fees larger retailers face.

While growth is high in online retail, PDD’s strategy has been to acquire a lot of customers in foreign markets, using loopholes that could eventually close. Moving to higher-end products may sound great, but could have lower returns as some of these gaps get more attention. I think investors are simply taking risk off the table, and that’s a good idea today.