Pinduoduo’s earnings could be hit by spending plans as competition heats up By Investing.com

Investing.com — Pinduoduo (NASDAQ: ) faces headwinds despite strong growth as online marketplace parent Temu aims to step up spending to fend off growing competition that could cloud the path to earnings growth, analysts at Macquarie said in a note on Tuesday.

Macquarie downgraded Pinduoduo to neutral from outperform and cut its price target for the stock to $126 from $220.

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

Pinduoduo’s management has hinted that they will step up investment to support high-quality merchants willing to innovate and improve quality. These merchants would also be offered significant reductions in transaction fees.

Increased marketing spend could lead to higher retailer discounts and marketing spend, which could potentially impact profitability, Macquarie added, while lowering its growth outlook for the company.

Macquarie cut its 2024E P/E multiple on PDD in half to 10x, aligning PDD with other domestic e-commerce partners.

Analysts at Citi also echoed similar concerns about increased competition and pointed to the mixed message from management on the earnings call that followed Pinduoduo’s quarterly results.

Parent company Temu said merchant and product growth continued to have a “solid” print in the second quarter, but also expressed concern about increased competition and changing consumer demand.

“If the platform has been able to attract an increasing number of new merchants and the number of products has grown significantly, and if all the growth has benefited from a ‘solid’ 2Q24 print, then why would the company suddenly see competition intensifying even more much and consumer demand has changed?

PDD’s Temu platform faces increasing competition from rivals including Alibaba Group Holdings Ltd ADR (NYSE: ) and JD.com Inc Adr (NASDAQ: ) offer “competitive low-priced products that may be of better quality than similar products sold on PDD,” Citi added.

The cautious outlook from PDD management overshadows Q2 results released on Monday. which beat Wall Street expectations, driven by a Temu-led jump in transaction services revenue.

While the shift to focus more on ecosystem quality and increasing merchant support is expected to be a costly endeavor, PDD’s net cash balance of $39 billion suggests they have the resources to make investments without- and endangers financial health.

The heightened investment cycle and potential earnings volatility may lead to more cautious valuations, Macquarie says, although PDD’s strong cash position and continued market share gains in its domestic businesses could provide some stability.