The firm’s executives warned of “inevitable” pressures following the loss
PDD Holdings (NASDAQ:PDD) stock tanked on Monday, shedding 28.51% and landing at exactly $100, its lowest price in more than six months.
The dive occurred even though PDD reported an 86% year-over-year revenue increase in 2024’s second quarter, along with 125% adjusted (non-GAAP) net income growth.
China-based PDD Holdings is mainly known for two e-commerce platforms: Pinduoduo, which offers a range of products, including home appliances and groceries, for home delivery, and Temu, which facilitates the sale of really cheap products of hit-or-miss quality.
It may seem surprising that PDD stock would crater after the company disclosed such powerful top-line and bottom-line growth. However, PDD Holdings’ sales growth didn’t live up to Wall Street’s expectations, and a PDD executive made remarks that evidently put investors in a sour mood.
Analysis: Sales growth was big, but not big enough
PDD Holdings’ second-quarter 2024 total revenue grew 86% year over year to the equivalent of $13.36 billion. In many situations, this would be considered excellent an excellent top-line result.
However, PDD Holdings VP of Finance Jun Liu admitted that, “in the past quarter, the firm’s revenue growth rate slowed quarter-on-quarter”.
Indeed, PDD’s year-on-year revenue growth rate went from 123% in 2023’s fourth quarter to 131% in 2024’s first quarter, and then down to 86% in the most recently reported quarter.
In other words, this is a rare situation in which 86% sales growth just wasn’t good enough for investors. Perhaps stock traders expected too much, though. Did they really think that PDD Holdings could continue to accelerate its year-on-year sales growth beyond 123% and 131%?
Wall Street also had high and possibly unrealistic expectations for PDD Holdings. Analysts looked for PDD to deliver $14.04 billion in quarterly revenue, but the actual result, as previously mentioned, was $13.36 billion.
Indisputable bottom-line results
Investors might not be impressed with PDD Holdings’ top-line results. However, they’d be hard-pressed to dispute PDD’s bottom-line results for 2024’s second quarter.
Here’s a rundown of PDD Holdings’ year-over-year growth:
- Operating profit of $4.48 billion, up 156%
- Non-GAAP operating profit of $4.81 billion, up 139%
- Net income attributable to ordinary shareholders of $4.4 billion, up 144%
- Non-GAAP net income attributable to ordinary shareholders of $4.74 billion, up 125%.
Across-the-board triple-digit percentage growth is hard to argue with, but traders still chose to dump their PDD stock shares upon the release of PDD Holdings’ quarterly results.
The company’s slowing sales growth was certainly a factor, but it wasn’t the only reason the market turned against PDD Holdings.
Forthright commentary spooks PDD’s investors
PDD Holdings’ management was forthright in its commentary — maybe too forthright. Honesty is supposed to be the best policy, but perhaps PDD’s executives provided more honesty than the market was able to handle all at once.
First of all, PDD Holdings Co-Chief Executive Chen Lei warned in an earnings call that the company sees “many new challenges ahead, from changing consumer demand, intensifying competition and uncertainties in the global environment”.
“We will enter a new phase of high-quality development that calls for increased investments and our profitability will be affected as a result,” Lei added.
Finance VP Liu echoed this warning, stating that PDD Holdings’ profitability will “likely to be impacted as we continue to invest resolutely.” Moreover, Liu expects that PDD’s “revenue growth will inevitably face pressure due to intensified competition and external challenges.”
“External challenges” may involve fragility in China’s economy and cutbacks in consumer spending. Meanwhile, when speaking of “intensified competition”, Liu is probably referring to Chinese e-commerce behemoth Alibaba (NYSE:BABA).
A possible play for bold contrarians
In any event, investors clearly didn’t want to hear about PDD Holdings’ revenue growth “inevitably” facing “pressure” or the company’s “profitability” being “affected.” That’s understandable, but the steep drop in PDD stock may have been overdone.
At this point, highly risk-tolerant investors might consider picking up a few PDD Holdings shares as a contrarian play. Just be prepared for a bumpy ride in the coming months as China navigates a challenging economy and PDD Holdings’ shareholders process the aforementioned starkly honest executive commentary.
