Pinduoduo: Why did the stock price drop more than 10% after earnings?

On November 21 (Eastern Time), $PDD(PDD.US) , $Baidu(BIDU.US), $TAL Edu(TAL.US), $Miniso(MNSO.US) and other Chinese concept stocks experienced declines, with e-commerce giant Pinduoduo plunging 10.64% on heavy volume, drawing widespread attention from investors.

From a news perspective, Pinduoduo's sharp decline is related to its latest earnings report.

Before the market opened on November 21 (Eastern Time), Pinduoduo released its Q3 2024 financial report. The data showed that in Q3, Pinduoduo achieved total revenue of 993.54 billion yuan (RMB, same below), a year-on-year increase of 44%, but below market expectations.

By segment, in Q3, revenue from online marketing services and other services was 493.51 billion yuan, up 24% year-on-year; revenue from transaction services was 500.03 billion yuan, up 72% year-on-year.

Comparatively, the performance of the online marketing services and other services segment was average, while the transaction services segment showed more impressive growth.

In terms of expenses, in Q3, Pinduoduo's sales and marketing expenses increased by 40% year-on-year to 304.84 billion yuan, mainly due to increased spending on promotions and advertising campaigns; general and administrative expenses rose 138% year-on-year to 18.06 billion yuan, and R&D expenses also increased year-on-year.

On the profit side, in Q3, Pinduoduo's operating profit was 242.93 billion yuan, up 46% year-on-year; under Non-GAAP standards, operating profit was 267.71 billion yuan, up 48% year-on-year.

Additionally, in Q3, Pinduoduo's net profit attributable to shareholders was 249.81 billion yuan, up 61% year-on-year; under Non-GAAP standards, net profit attributable to shareholders was 274.59 billion yuan, up 61% year-on-year.

Moreover, from a sequential perspective, Pinduoduo's revenue growth in Q3 slowed compared to the previous quarter, while net profit attributable to shareholders fell 22% quarter-on-quarter.

Regarding the weaker-than-expected Q3 performance, industry insiders pointed out that on one hand, competition in the e-commerce sector remains fierce; on the other hand, Pinduoduo's initiatives such as "100 Billion Subsidies" and "E-commerce Westward Expansion" impacted short-term financial results.

UBS noted in a report that Pinduoduo's quarterly results fell short of expectations. Q3 revenue was 990 billion yuan, up 44% year-on-year but 3% below expectations. Adjusted net profit was 275 billion yuan, 7% below expectations, mainly due to gross margin pressure from unfavorable mix changes at its international platform Temu and subsidies for merchants.

UBS stated that while Pinduoduo's performance was disappointing, the impact on core market margins appears controllable or explainable at this stage, and the core e-commerce business remains healthy.

During the post-earnings conference call, Pinduoduo Co-CEO Zhao Jiazhen said: "The overall competitive environment in e-commerce remains very intense. Constrained by the natural trajectory of business development, long-term growth will not be linear. Under these circumstances, a slowdown in revenue growth is inevitable."

Zhao Jiazhen added: "In the second half of this year, due to limitations in third-party platform capabilities, our team did not fully capitalize on macroeconomic policy tailwinds. As a result, to maintain the competitiveness of the same products, we incurred much higher costs than our peers, which will inevitably affect our profitability in the near and medium term."

Zhao Jiazhen expects that Pinduoduo's disadvantages compared to peers will persist significantly for some time, and the financial impact may further expand.

This may have also raised concerns among investors.

However, Zhao Jiazhen stated bluntly during the call: "We firmly believe that high-quality development of the ecosystem and supply side is the foundation for the platform's long-term growth and creating lasting value for consumers. This is a long and patient process. We are prepared for a protracted battle, and changes in the external competitive environment will not affect our pace."

Pinduoduo Group Chairman and Co-CEO Chen Lei added: "Beyond financial data, we place greater emphasis on the long-term value brought by ecosystem investments. In the coming quarters, Pinduoduo will continue to invest in strategies such as 'New Quality Supply' and 'E-commerce Westward Expansion' to deliver more sustainable returns to users, merchants, and the industry."

Author: Yan Shisi