PDD Holdings, the parent of Chinese online retailer Pinduoduo and cross-border e-commerce platform Temu, experienced a dramatic fall in its stock price this week, plunging over 30% at one point—its steepest decline since going public in 2018.
For the second quarter, PDD reported revenue of RMB 97.1 billion (USD 13.7 billion), reflecting an 86% year-on-year (YoY) growth but falling short of market expectations of RMB 100 billion (USD 14.1 billion). Online marketing services generated RMB 49.1 billion (USD 6.9 billion), while transaction services brought in RMB 47.9 billion (USD 6.7 billion), both below forecasts of RMB 50.5 billion (USD 7.1 billion) and RMB 50 billion (USD 7 billion), respectively.
Despite what might be considered a solid performance within the industry, the earnings report triggered an 18% premarket drop due to missed expectations and a noticeable slowdown in sequential revenue growth.
The sharp selloff following the market’s opening was largely driven by management’s firm stance during the earnings call.
Chen Lei, chairman and co-CEO of PDD, highlighted increasing challenges in the company’s global business, citing a rapidly changing international environment where operations are disrupted by non-commercial factors. He warned that uncertainty in business development is likely to grow, making a gradual slowdown in revenue inevitable. Chen also noted that PDD remains in an investment phase across several areas, with no plans for share buybacks or dividends in the foreseeable future.
The slowing growth in online marketing services revenue, primarily driven by advertising, also drew considerable attention. The YoY growth rate was only 29%, the lowest in nearly ten quarters, matching the rate from Q1 2022.
PDD’s international business, which the company views as its second growth engine, also underperformed expectations. It’s worth noting that Temu’s revenue—the difference between frontend sales and supplier costs—is included in PDD’s transaction service revenue. Thus, fluctuations in this segment also reflect Temu’s performance.
Despite Temu’s ongoing global losses, 36Kr reported exclusively that, as of July this year, Temu was close to turning EBITDA-positive in the US market.
This year, Temu has intentionally reduced its reliance on the US market. According to a report by The Information, due to uncertainties and signs of saturation in the US market, Temu aims to boost performance in other regions, reducing the US GMV share from 60% to 30%. Sources from 36Kr indicated that the US currently accounts for around 40% of sales.
Temu’s near profitability in the US is largely attributed to a reduction in advertising and other spending, which is evident in PDD’s financials.
In Q2 2024, PDD’s sales and marketing expenses were RMB 26 billion (USD 3.7 billion), below market expectations of RMB 27.9 billion (USD 3.9 billion), representing a 48% YoY increase, significantly lower than the 85% revenue growth and last year’s 55% growth rate.
According to Dolphin Research, Temu’s marketing expenses increased only slightly quarter-on-quarter, while the main platform’s marketing spend was flat or slightly up YoY. The restrained marketing spend is a key reason PDD was able to deliver strong profits.
Internal sources revealed that Temu has been scaling back its ad spending in the US, reallocating resources to Europe, Japan, South Korea, the Middle East, and Latin America. A memo obtained by 36Kr indicates that Temu’s global budget for this year is USD 4.3 billion, but actual spending might fall below USD 4 billion due to reduced US investments.
A Temu seller told 36Kr that, although they noticed a significant reduction in North American marketing efforts, their sales remained unaffected as US traffic and daily active users had stabilized.
Last year, Temu became a major client for Google and Meta due to its aggressive ad spending during its US expansion. 36Kr reported that Temu’s daily ad spend on Facebook and Google reached tens of millions of dollars. According to JPMorgan analysts, Temu’s Q3 2023 ad spend on Facebook and Instagram totaled USD 600 million.
However, as of Q2 this year, Temu has significantly cut back its ad spending on these high-traffic platforms. Meta’s financial report confirms this trend. While ad revenue from its Asia-Pacific customers surged 41% YoY in Q1, growth slowed to 28% in Q2. CFO Susan Li remarked during the earnings call that “the period of strongest demand from Chinese advertisers has passed.”
Similarly, Google’s report showed that YouTube’s ad revenue growth slowed by 8 percentage points quarter-on-quarter to 13%, with management attributing this to the high base effect from heavy ad spending by APAC e-commerce companies in Q2 2023.
Temu’s current advertising strategy in the US is no longer about acquiring new users but rather increasing the activity, purchase frequency, and average order value of existing users. According to 36Kr, under the full consignment model, US users on Temu shop approximately 24 times per year, with an average order value of around USD 40. As Wired previously reported, Temu’s long-term goal is to boost these metrics to 30 purchases per year and USD 50 per order.
36Kr previously analyzed that Temu’s losses primarily stem from marketing expenses and fulfillment costs, which can account for up to 30% of sales. Efforts to reduce losses are focused mainly on these areas.
To lower fulfillment costs, Temu introduced segmented shipping, sea freight, and the heavily promoted partial consignment model—where merchants handle logistics, shipping, and warehousing costs. In recent quarters, Temu’s gross margin was pressured by fulfillment costs, but in Q2, it rose by 1 percentage point to 65.3%, marking the first YoY increase.
Dolphin Research suggests that the partial consignment model may be a key factor behind the rising gross margin. Currently, the scale of that model remains small in the US, with most orders still being fulfilled under the full consignment model. However, 36Kr understands that the cost-effectiveness of full consignments has not improved significantly, and the progress of sea freight, which could cut costs but has longer delivery times, has been slow.
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Sources also revealed to 36Kr that, despite merchants handling fulfillment in the partial consignment model, the business is still operating at a loss. This may be due to the company offering more profits to attract buyers or using promotions with lower markups to drive traffic.
Nevertheless, the partial consignment model remains a key focus for Temu’s future. Recently, Temu announced the official opening of registration for local stores in Europe, and the partial consignment model, originally scheduled to launch in Japan in October, has already been launched ahead of schedule.
While Temu continues to grow rapidly, geopolitical risks, tariff policies, and other uncertainties loom large. With growth slowing on its main platform and international business facing an unclear outlook, can PDD maintain its trajectory?
PDD has denied the above claims and data.
KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Li Xiaoxia for 36Kr. Zhong Yixuan and Ren Cairu also contributed to this report.