Pinduoduo Shares Tumble 20% as Merchant Support Program Slashes Profits

Pinduoduo's Profit Plunge: Long-Term Vision Meets Short-Term Pain

By Financial Markets Staff | May 27, 2025

PDD Holdings, the parent company of Chinese e-commerce giant Pinduoduo and cross-border platform Temu, saw its shares plummet nearly 20% in pre-market trading Tuesday after reporting first-quarter results that substantially missed analyst expectations, revealing the steep price of its ambitious merchant subsidy program.

The company reported adjusted net profit of ¥16.92 billion ($2.33 billion), a 47% year-over-year decline that fell far short of the ¥27.88 billion analysts had projected. Revenue growth slowed to just 10%, reaching ¥95.67 billion compared to analyst estimates of ¥101.6 billion, marking the company's slowest growth rate since the pandemic.

"In the current volatile market environment, platforms must take on social responsibility, be unafraid of short-term sacrifices, and remain committed to long-term investment," said Chen Lei, Pinduoduo's Chairman and Co-CEO, during the earnings call, signaling that profitability may remain under pressure in coming quarters.

Strategic Shift: From Discounts to "Support"

At the heart of Pinduoduo's financial transformation is its upgraded merchant support initiative. The company has expanded its previous "10-Billion Yuan Discount" program to a far more ambitious "100-Billion Yuan Support" strategy, dramatically increasing its financial commitment to merchants navigating economic uncertainty.

This strategic pivot drove sales and marketing expenses up 43% year-over-year to ¥33.40 billion, now representing an unprecedented 34.9% of revenue compared to 27% in the same quarter last year. The increased spending created a significant mismatch between revenue growth and expenditure that alarmed investors.

"These investments put pressure on short-term profitability but provided merchants with the space to adapt and focus on high-quality, sustainable growth," Chen explained, emphasizing the company's prioritization of ecosystem health over immediate financial returns.

Multiple Headwinds Converge

PDD's challenges extend beyond its voluntary spending increase. The company faces mounting pressure on multiple fronts that threaten to compress margins even further:

International trade tensions have cast a shadow over Temu, PDD's rapidly expanding global shopping platform. Recent negotiations have only temporarily reduced U.S. tariffs on Chinese goods to approximately 30% for a 90-day window, while Congressional efforts to reform the de minimis exemption—which currently allows duty-free entry for packages valued under $800—could devastate Temu's fundamental business model.

"Even with the temporary tariff reduction, the economics for low-ticket items like apparel and toys lose their competitive edge," noted a senior equity analyst who requested anonymity due to ongoing coverage. "If de minimis reform passes, their entire U.S. price narrative collapses."

Meanwhile, domestic regulatory scrutiny continues to reshape China's e-commerce landscape. Authorities have pushed platforms toward what they term "high-quality development"—effectively limiting take rates and profit extraction—while competitors like Douyin (China's TikTok) and JD.com have launched their own subsidy programs, potentially triggering a margin-eroding price war.

Zhao Jiazheng, Executive Director and Co-CEO, acknowledged these challenges: "Changes in the external environment have posed new challenges for merchants. At this critical moment, we have leveraged the social function and responsibility of our platform enterprise to firmly support merchants through economic cycles."

The Numbers Behind the Selloff

The market's harsh reaction stemmed from multiple disappointing metrics that collectively painted a picture of deteriorating fundamentals:

• Operating profit fell 38% year-over-year to ¥16.09 billion
• Operating margin collapsed to 16.8% from 29.9% a year earlier
• Operating cash flow declined 26% to ¥15.52 billion
• Diluted earnings per American Depositary Share plunged 48% to ¥9.94 , far below the expected $2.49

Every additional yuan of revenue in the quarter effectively cost the company 1.4 yuan in incremental operating expenses—an unsustainable ratio that management explicitly warned would continue, stating that "financial results may continue to reflect the impact of sustained investments."

Cash Mountain Offers Limited Comfort

Despite the profit compression, PDD maintains substantial financial resources. The company's cash and short-term investments grew 10% since December to reach ¥364.5 billion (approximately $50 billion), providing significant runway to weather continuing investments.

However, this cash pile has become a double-edged sword for investors. The declining operating cash flow has raised concerns about the sustainability of the company's subsidy strategy, while management has consistently rejected shareholder calls for stock buybacks, stating earlier this year that it was "not an appropriate time for repurchases."

"The question isn't whether they can afford this strategy—they clearly can," explained a portfolio manager at a global asset management firm who holds PDD shares. "The question is whether these investments will generate returns that justify the current sacrifice. Markets hate uncertainty, and right now, there's no clear timeline for when this will pay off."

Investment Outlook Turns Binary

The earnings miss has transformed PDD's investment case from a growth story to what analysts increasingly describe as a "high-beta duration call" on both global trade policy and China's domestic subsidy approach to e-commerce.

Wall Street analysts have begun slashing their forward earnings estimates, with consensus expectations for fiscal year 2025 earnings per share now trending toward $9-10, down from previous projections of $12-13. At current prices, this implies a forward price-to-earnings ratio of 14-15x, positioning PDD between domestic rival JD.com and the deeply discounted Alibaba.

The company's valuation outlook has become increasingly binary, with potential outcomes ranging from $84 to over $300 per share depending on how trade and competitive dynamics evolve. Investors face a challenging decision: wait for evidence that the subsidy strategy is generating returns, or capitalize on what might be an overreaction to short-term pain.

"Long-term fundamental investors should remain patient," advised a technology sector strategist at a major investment bank. "Wait for at least one quarter showing sales and marketing expense deceleration and greater clarity on the tariff situation before making significant moves."

As PDD navigates this pivotal period, three key developments could shift investor sentiment: transparent disclosure of Temu's unit economics, capital expenditure guidance signaling supply chain diversification outside China, or regulatory clarity on the U.S. tariff framework after the current 90-day window expires in August.

Until then, even with the stock trading near $100 after recovering from its pre-market lows, PDD remains caught between its ambitious vision and the market's demand for profitability—a tension that appears unlikely to resolve in the immediate future.