Foreign banks are hotly discussing PDD: What does "smashing the plate" conference call mean?

Pinduoduo's management made a statement, causing the stock price to plummet the most since its listing. What does this conference call mean, sparking heated discussions on Wall Street.

Morgan Stanley believes that the comments on the decline in long-term profitability are too negative; Citigroup suggests that it may be to manage investor expectations; Goldman Sachs still sees a bright long-term growth prospect for Pinduoduo, while Bernstein believes that healthy and sustainable growth is actually a "good thing".

Pinduoduo released its second-quarter financial report this week, with a year-on-year revenue growth of 86%, approaching the milestone of one trillion, but falling short of market expectations, and the growth in online market service revenue also did not meet expectations.

The management's statements during the subsequent conference call further shocked the market, first warning of a slowdown in profitability. Due to intensified competition, it is expected that future revenue growth will slow down and short-term profits will be sacrificed, leading to a potential decline in long-term profitability. Secondly, there will be no dividends or buybacks, as Pinduoduo is still in an investment phase and will not engage in buybacks or dividends in the next few years.

What does this "self-destructive" statement convey?

Morgan Stanley: Comments on the decline in long-term profitability are too negative

Morgan Stanley stated that Pinduoduo's second-quarter online market service revenue growth fell short of expectations, indicating weak consumption and intensified competition. However, we believe that the management's comments on the decline in long-term profitability are too negative.

The management's tone during the financial report conference call was unexpectedly negative. The management mentioned that the domestic business is facing changes in consumer demand (increasing emphasis on rational consumption) and intensified competition, while Temu faces uncertainties internationally, leading to a slowdown in revenue growth starting from the second quarter of 2024.

Pinduoduo plans to increase investment in high-quality merchants by exempting 10 billion yuan in merchant fees in the next 12 months. It is expected that profitability will trend downward starting from the third quarter of 2024, and regardless of any short-term rebounds, a decline in long-term profitability is inevitable.

We believe that the management's guidance is too pessimistic. Pinduoduo remains the fastest-growing company among all e-commerce companies in China, and we expect this growth to continue to bring operational leverage and improve long-term profitability.

However, Goldman Sachs aggressively lowered its target price and revised earnings expectations:

Lowered the target price from $220 to $150, maintaining a "buy" rating, with a 2025 expected price-to-earnings ratio (P/E) of 13 times. Pinduoduo is the only e-commerce company that will surpass industry growth, so its valuation should be higher than Alibaba's 9 times and JD.com's 7 times.

Lowered GAAP diluted earnings per share (EPADS) expectations for 2024, 2025, and 2026 by 8%, 16%, and 22% respectively to reflect increased investments.

Citigroup: Contradictory statements, playing "expectation management"?

Citigroup believes that the management's information is somewhat contradictory, and they may be managing competition and investor expectations in a "low-key" manner. Due to limited investor communication, lack of operational indicators and financial details disclosure, along with the management's cautious outlook comments, the stock price may fluctuate until Pinduoduo exceeds expectations for several quarters to regain market confidenceCiti lowered its target price from $194 to $120 due to increased competition, changes in consumer patterns, and external uncertainties. The expected P/E ratio for 2025 was adjusted from 12 times to 9 times. Despite having a net cash balance of $39 billion, the management still rejected any shareholder return plan. Citi downgraded its rating from Buy to Neutral/Hold.

In terms of financial performance expectations, given the cautious and more pessimistic tone of the management, Citi adjusted the full-year revenue/non-GAAP net profit expectations for 2024 to 2026, with decreases of 6.5%/2.4%, 11.6%/17%, and 13.5%/19.8% respectively. Citi predicts a 58% year-on-year increase in full-year revenue to 390.9 billion RMB in 2024, with a non-GAAP net profit of 136.4 billion RMB and a profit margin of 35%.

Goldman Sachs: Bullish on Pinduoduo's Long-Term Growth Prospects

Goldman Sachs previously supported Pinduoduo and in its latest report, while lowering its target price, it remains optimistic about its long-term growth prospects:

We re-evaluated the investor debate on domestic business progress and Temu investments, and lowered revenue forecasts for 2024-2026 by 4-5% and net profit forecasts by 12-14% due to slowing online marketing revenue growth.

Therefore, we lowered our 12-month target price from $184 to $165, with a valuation of 13 times for the domestic Pinduoduo business.

As Pinduoduo's P/E ratio further declines to 8 times, we believe the risk-reward ratio becomes more attractive. Considering the 2024 expected P/E ratio of 5 times, we still see good long-term growth prospects for Pinduoduo.

We remain bullish on Pinduoduo based on its advertising technology capabilities (ROI-based marketing tools) and China's cost-competitive suppliers/merchants/supply chain, along with a favorable risk-reward ratio, and the current market value does not yet include the valuation of Temu.

Bernstein: Healthy and Sustainable Growth is a Good Thing

Bernstein is the most optimistic, believing that healthy and sustainable growth is actually a good thing, helping PDD to further compete for market share:

Isn't healthy and sustainable growth a good thing? Is the company's communication not only for investors, a platform that is more friendly to merchants and invests in the quality of the supply side should become stronger and better at taking market share from peers. Even with the guidance lowered, Pinduoduo's stock is currently trading at a P/E ratio of about 7 times the expected 2025 earnings, lower than Alibaba and JD, where the valuation multiple reflects concerns about market share loss and non-growth.

This call is highly unconventional even by Pinduoduo standards, but rationally thinking, giving up short-term profits to improve relations with merchants, increase the variety and quality of products on the platform, and enhance compliance at home and abroad should make Pinduoduo a stronger competitor and drive higher growth under otherwise similar conditions.

As for the company's increased investment, giving up RMB 10 billion in merchant transaction fees has only a small impact on the company's future profitability. Unless the domestic monetization rate actively and continuously declines, it feels difficult to understand the scale of incremental investment required to truly reduce the company's profits