Why PDD Holdings stock is down today

Actions of PDD Holdings (PDD -29.70%) fell today after the Chinese e-commerce company and owner of Pinduoduo and Temu reported disappointing revenue growth in the second quarter and gave a downbeat commentary on future quarters.

Shares were down 28% at 11:12 a.m. ET on the news.

Image source: Getty Images.

PDD hits a wall

PDD bucked the Chinese e-commerce trend, continuing to support phenomenal growth, while peers like Alibaba and JD.com they fought However, that now seems to be changing.

The second quarter numbers were still impressive as revenue rose 86% in the period to $13.4 billion, but that was below the analyst consensus of $14.04 billion.

Margins also continued to expand as adjusted operating profit rose 139% to $4.48 billion. PDD improved its gross margin and gained leverage on expenses such as sales and marketing and research and development.

All in all, the company posted adjusted earnings per share of $3.20, up from $1.45 in the year-ago quarter and better than the consensus estimate of $2.73.

However, investors seemed more concerned about weaker-than-expected growth and cautious comments from management, as co-CEO Lei Cehn said: “While encouraged by the solid progress we’ve made in recent quarters, we see many challenges ahead. ”, implying more intense competition. He added: “We are prepared to accept short-term sacrifices and the potential drop in profitability.”

What’s next for PDD

PDD didn’t provide specific guidance for the current quarter or the rest of the year, as Chinese companies don’t typically provide guidance, but comments on the earnings call indicate it expects more intense competitive pressure to weigh on revenue growth.

The good news is that PDD stock looks cheap at a price-to-earnings ratio of less than 10 now, a shockingly low valuation for a company that continues to grow very quickly, reflecting the caution of investors in China.

Today’s sell-off could prove to be a buying opportunity, but investors may want to take a cautious approach with the stock given the broader challenges in China and management’s indication that profits could soon decline.