PDD shares plummet due to sales Miss Temu Parent’s competition is growing.

PDD companies (PDDShares fell early Monday after parent company Temu reported slower-than-expected sales growth for the second quarter. China-based PDD, which also operates Pinduoduo, warned that increased competition will test rapid sales growth.

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For the quarter ended June 30, PDD Holdings said it earned an adjusted 23.24 yuan per American Depositary Share (ADS) on revenue of 97.06 billion yuan, or $13.64 billion. Analysts polled by FactSet expected profit of 20.43 yuan per ADS on revenue of 100.2 billion yuan, or $14.1 billion

Adjusted profits rose 122% year-on-year, while local currency sales increased 86% year-on-year. The sales growth marked a slowdown from the 131% that PDD Holdings recorded in the first quarter of the year.

“Looking ahead, revenue growth will inevitably come under pressure due to increased competition and external challenges,” PDD Vice President of Finance Jun Liu said in a press release. “Profitability is also likely to be impacted as we continue to invest decisively.”

During today’s morning stock market action, PDD stock is down more than 28% to 99.94, well below the 50-day and 200-day lines.

PDD leadership expects ‘short-term sacrifices’

PDD shares soared last year, helped by the meteoric rise of international discount shopping site Temu, which has emerged as a challenger to Amazon (AMZN). Temu facilitates direct sales from Chinese manufacturers in dozens of countries and was the most downloaded app in the US last year.

In China, Pinduoduo has challenged incumbents such as Alibaba.com (BABA) And JD.com (J.D) by offering discounted items at a time when consumer spending is low. Both Alibaba and JD focused on offering discounts and promotions last quarter.

Although PDD spent billions on advertising to grow Temu, PDD achieved strong profit growth in 2023. Adjusted earnings per share rose 70% year-on-year throughout 2023, to 46.51 yuan per ADS.

But PDD Holdings is telling investors it may need to trade on earnings growth to continue improving and growing its products.

“We will invest heavily in the trust and security of the platform, support high-quality sellers and relentlessly improve the seller ecosystem,” co-Chief Executive Lei Chen said in a press release. “We are willing to accept short-term sacrifices and a potential decline in profitability.”

Growing competition

The ruling comes as consumers continue to scale back their spending in China. Both Alibaba and JD reported slower revenue growth for their June quarters.

PDD also competes with Alibaba’s AliExpress business in international markets, along with fast-fashion rival Shein and TikTok parent company ByteDance. Meanwhile, competitors who seemed blindsided by Temu’s rise are starting to adapt.

In late June, The Information reported that Amazon was preparing a Temu challenger. For the American tech giant, Temu is a competitive threat to discount-hungry shoppers and merchants selling from China. A new section of Amazon’s website reportedly sells goods directly from merchants in China. Similar to Temu’s operations, the section would offer cheaper prices but with longer delivery times.

Meanwhile, Temu’s direct-from-China model is under scrutiny from regulators. A bipartisan group of lawmakers unveiled legislation earlier this month that could change the “de minimis” provision of U.S. trade policy. Currently, packages valued at less than $800 can enter the U.S. tax-free as long as they are addressed to an individual.

European lawmakers are considering changing similar exceptions in EU trade policy. Bloomberg News reported last month.

Thanks to the facilities, Temu was able to keep costs low. PDD has previously acknowledged in filings with regulators that its operations could be “materially and adversely affected” if existing tariff exemptions were no longer available.

During his earnings call Monday, Chen said PDD’s global business is “still developing” and has reached 70 markets.

“As our business develops, we have noticed that changes in the external environment are accelerating and that our operations are increasingly influenced by a number of non-business factors. We are seeing a significant increase in uncertainty,” Chen told analysts, according to a FactSet transcript. “Meanwhile, competition is a constant theme in the e-commerce industry and is expected to increase.”

PDD stock is sinking

When earnings were released on Monday, PDD shares were down about 4% on the year, but recovered from a slump earlier this year. But Monday’s fall pushed PDD shares to their lowest level since October 2023.

The stock fell below PDD’s 21-day, 50-day and 200-day moving averages.

Helped by strong earnings growth, PDD stock entered trading Monday with a best-possible IBD Composite Rating of 99, according to IBD inventory check. The score combines five separate self-ratings into one rating. The best growth stocks have a composite rating of 90 or higher.

Additionally, PDD stock had an IBD Relative Strength Rating of 87 from 99.

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