( $PDD Holdings Inc(PDD)$ , HOLD) - Slowing Growth and Rising Investments Create Near-Term Uncertainty; Downgrading to HOLD
We are downgrading PDD to HOLD but maintaining our price target of $130 (unchanged) following below-consensus 4Q revenue and profit performance. 4Q revenue grew 24% y/y, decelerating from 44% in 3Q, and was 2%/3% below Tiger/Street.
Revenue missed. By segment, online marketing services revenue increased 17% y/y, compared to 24% in 3Q, marking a slowdown relative to domestic peers. This segment came in 1% above Tiger/Street. Transaction services revenue grew 33% year-over-year, a sharp deceleration from 72% in the previous quarter, and was 5% below Tiger and 7% below the Street, likely due to tougher comp for Temu and slowing domestic GMV growth.
Profitability missed. Gross margin of 56.8% declined 3.7 percentage points y/y, likely due to increased revenue mix shift to Temu and continued investments in PDD’s high-quality ecosystem in the domestic market. The sales and marketing expense ratio declined to 28.3%, from 30.7% in 3Q and 30.0% a year ago. Non-GAAP operating income of RMB 28.0 billion was 4% below Tiger and 5% below the Street.
Looking ahead, PDD’s commitment to investing in merchant fee reductions, logistics improvements, and platform ecosystem enhancements will likely weigh on near-term profit margins. While the company has successfully navigated past investment cycles that ultimately led to market share expansion and higher absolute profits, the current competitive intensity from Alibaba, JD.com, and Douyin e-commerce creates greater near-term uncertainty.
While PDD remains a structural winner in China’s e-commerce landscape, the combination of intensifying competition, increased investment levels, and growing regulatory uncertainty is creating short-term margin pressure. Despite its strong cash flow and market share expansion opportunities, the risk-reward profile appears less compelling at current levels. Heightened scrutiny over cross-border e-commerce, evolving compliance requirements, and potential policy shifts add another layer of risk to PDD’s global expansion strategy. We downgrade PDD to HOLD until we see clearer signs of profitability stabilization, regulatory clarity, and sustainable growth in its international operations. Stock is currently valued at 11.0x ‘25E non-GAAP EPS, reasonable in our view, given slowing EPS growth (we are modeling largely flat for ‘25) and risks mentioned above.
Estimate revisions. Decreasing 1QE total revenue estimate by 2%, but increasing 1QE non-GAAP net income by 2% on lower opex.Decreasing ‘25E total revenue estimate by 3%, and decreasing ‘25E non-GAAP net income by 3%.
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