Temu owner Temu reported well, but investors are confused. Should we buy the stock?

The shares of Chinese online retail giant PDD Holdings, which owns Temu marketplace, were highly volatile after the publication of quarterly reports on Monday. They first jumped by 11% on the premarket, then retreated, then began to grow steadily after the opening of the main trading, but then lost everything. Investors were alarmed by the fact that revenue growth was the slowest in recent years. Profit turned out to be higher than expected, but the management warned about tough competition and ongoing investments, which will put pressure on profitability. Additional risks to the business are posed by U.S. duties, the elimination of tax incentives and unstable demand in China.

Depository receipts (ADR) of the parent company of retailer Temu PDD Holdings, traded in the U.S., fell by 2.27% at the very beginning of the main trading on August 25, but then sharply changed course and rose to the peak for the day - almost 5% compared to the last closing level. But after that the shares lost everything gained, and the dynamics became almost zero. At the pre-market the securities were growing in price by 11% at the moment, noted Barron's.

The reason for the ADR move was the release of quarterly earnings, which came in much better than expected, with second-quarter adjusted earnings of $3.08 per share on revenue of $14.5 billion, while analysts, according to FactSet data cited by Barron's, expected $2.16 per share and revenue of $14.3 billion.

Temu owner Temu's sales growth slowed to 7% in the second quarter after 10% in the first. This was the slowest growth rate in recent years, but the figure still exceeded analysts' forecasts, Bloomberg writes. Net income fell 4%, but both it and adjusted operating profit were above expectations.

"Revenue growth continued to slow down this quarter amid fierce competition," Barron's quoted PDD financial vice president Jun Liu as saying. Continued investment may continue to put pressure on profitability in the short term, he said. He added that the profit level achieved cannot be considered sustainable and the company expects it to fluctuate in the future.

PDD's adjusted operating profit in the second quarter exceeded expectations for the first time in four quarters, helped by lower-than-forecast marketing expenses, according to Bloomberg Intelligence analysts Catherine Lim and Trini Tan. That helped offset record-low gross margins, which they said may have resulted from changes in Temu's global operations.

At the same time, a return of margins to previous high levels is unlikely, Bloomberg writes. However, the quarterly results give the first signals that the company's profitability may be more sustainable than previously thought, despite continued investments and PDD's focus on long-term growth at the expense of short-term gains.

Pressure on margins is intensifying on several fronts at once. On the one hand, PDD is forced to keep prices low on the home market, on the other hand, it is increasing costs amid multi-billion dollar investments in support for sellers. An additional factor is the higher costs of international delivery due to U.S. duties, Reuters writes.

"Given that earnings are already trending lower, the market may opt for a 'wait and see' approach to gauge the extent of further potential erosion.... Compared to its peers, we think PDD's higher reliance on the U.S. via Temu will hinder its earnings growth," CFRA analyst Jian Xiong Lim said as quoted by Reuters.

Despite these challenges, analysts remain generally positive. Of the 46 ratings assigned to PDD securities, 32 suggest the advice to buy them (Buy and Overweight), 12 take a neutral stance (Hold), and only two recommend selling the securities (Underweight and Sell).

The reporting showed that PDD Holdings increased spending in almost all areas, from server capacity to marketing and sales. PDD sees such spending as part of its strategy to develop an ecosystem for buyers and sellers, Reuters notes.

One element of this strategy was Temu's move to a "fully managed" trading model, in which the company has more control over product selection, pricing and logistics. The focus is on using a large-scale supply chain to keep prices as low as possible. But it's getting harder to do so: according to a survey by marketing firm Omnisend released in August, 30 percent of U.S. shoppers have already noticed Temu's prices rising, Reuters writes.

Additional pressure is being exerted by external factors. Demand remains volatile in China, and in the U.S., a de minimis tax credit that allowed companies like Temu and Shein to ship small orders duty-free was revoked in May. Bloomberg Intelligence estimates that Temu's monthly active users have since fallen 46% in the April-June period.

The situation is also complicated by macroeconomic factors. The Chinese economy in July showed the strongest slowdown since the beginning of the year, which increased expectations of new stimulus measures. The authorities have already increased subsidies on consumer goods, including smartphones and home appliances, to support demand, Bloomberg writes.

Amid the trade war with the U.S., uncertainty for Chinese companies remains, with Donald Trump's administration pushing back the deadline for new duties to late fall.

To alleviate the pressure, Temu has begun to more aggressively promote products already in U.S. warehouses and is trying to attract more local sellers. But competition remains high: global e-commerce leader Amazon is using the scale of its business to get better terms from suppliers, and PDD's Chinese rivals - from Alibaba Group to JD.com - are stepping up competition in related areas, including food delivery and express shopping, Bloomberg notes.

This article was AI-translated and verified by a human editor