Goldman Sachs remains bullish on PDD: Q2 growth rate still one of the fastest, PE ratio below 10 already reflects concerns, Temu has not provided a valuation

Pinduoduo plunged nearly 30% overnight, marking the largest drop since its IPO, as lower-than-expected performance and warnings from company executives dampened market confidence, but Goldman Sachs remains bullish on Pinduoduo.

Overnight, Pinduoduo released its second-quarter results, with revenue increasing by 86% year-on-year, approaching the milestone of one trillion, slightly below market expectations; however, it also achieved operating profit exceeding expectations for the sixth consecutive quarter, reaching 35 billion, a 139% year-on-year increase.

Goldman Sachs has given Pinduoduo a buy rating in its latest report, with a 12-month target price of $184:

Pinduoduo's stock performance this year has been poor, with a current P/E ratio of less than 10 times, reflecting investors' concerns about intensified domestic competition and geopolitical risks in Temu.

At the same time, faster growth in Pinduoduo's GMV and transaction service revenue exceeding expectations indicate continued growth momentum in Temu. Pinduoduo remains one of the fastest-growing companies in China's internet sector in the second quarter, and its strategies/investments will drive future growth.

We maintain a buy rating on Pinduoduo based on its advertising technology capabilities (ROI-based marketing tools) and China's cost-competitive suppliers/merchants/supply chain, along with favorable risk-return characteristics. The 12-month target price is $184, representing an 84% upside potential from the current level, with the current market value not yet factoring in the valuation of Temu.

Regarding the sharp decline overnight, Goldman Sachs believes this severe negative reaction may stem from three factors:

1. Investors had high expectations before the financial report was released. Due to strong market expectations, Pinduoduo's stock price rose by about 20% since the end of July, while the KWEB (KraneShares CSI China Internet ETF) index fell by 4% during the same period;

2. Online marketing service growth showed the first signs of normalization, with year-on-year growth slowing to 29%, below market expectations. However, we believe Pinduoduo's performance is still significantly better than Alibaba's customer management revenue growth of 1% and the median growth of Kuaishou's e-commerce advertising.

3. Comments from management startled the market. Pinduoduo's management pointed out during the conference call that due to intensified competition and the possibility of declining long-term profitability to drive high-quality development, future revenue growth is expected to slow down and short-term profits may be sacrificed; Pinduoduo plans to allocate 10 billion yuan in the next 12 months to support high-quality merchants; as the overall business is still in the investment phase, Pinduoduo will not engage in buybacks or dividends in the coming years.

In addition, Goldman Sachs highlighted other bright spots in Pinduoduo's performance, including Temu's strong GMV reaching $11 billion and a 234% year-on-year growth in transaction commission income. Profit margins have been increasing quarter by quarter due to reduced subsidy levels in mature markets (such as the United States) and strict control over procurement prices. Adjusted EBIT (earnings before interest and taxes) also exceeded expectations, possibly due to improved domestic profitability and Temu's unit profitabilityHowever, Goldman Sachs also issued a warning of a downward trend in stock prices:

(1) Due to the decline in return on investment in e-commerce/based on sales advertising inventory increase, and the narrowing gap in GMV growth between industries, online marketing revenue may be lower than expected; (2) When entering Europe and other affluent consumer markets, geopolitical headwinds may be greater than expected; (3) If Alibaba's new low-price advertising initiatives are successful, and Douyin's shelf-based low-priced product expansion speed exceeds expectations, competition may be more intense than expected; (4) Reinvestment for maintaining growth may pose downward risks to core profit margins; (5) Lack of business performance and profitability disclosure in segments, which may lead to difficulties in analyzing/estimating domestic and international (Temu) performance and profitability