Is Temu already close to breakeven?

Wednesday night (22 May) Asian time, PDD group, the parent of Temu, released its 2024 Q1 results. The results are again defying the most optimistic expectations: revenue was up 131% YoY, operating profit up 275%; whilst net profit up 246%. 

The stock market again responded ambivalently to the results. The prices moved up and down during the first trading after the results, eventually settling at a mild 1.13% above previous day closing. The second day though, it went up a further 4.45%. 

Some facts and thoughts: 

1. Pinduoduo founder Colin Huang wrote that “Pinduoduo is not a conventional company”  in his shareholder letter in 2018 (he must have been inspired by Warren Buffett, whom he had lunch with in early days of his career); 
2. During the latest earnings call, the management, including the Co-CEOs Chen Lei and Zhao Jiazhen, did not boast about how great the results were (as many other CEOs would). Instead, their flat tone and the language used almost felt like they just had a bad set of results instead. One thing Chen Lei mentioned was “Our business does not follow a linear path and our earnings will almost certainly fluctuate. Therefore, we suggest our shareholders not to measure our overall performance with results from a few quarters.” How do you interpret that? 
3. This has said a lot about PDD’s culture, which we have written extensively about on our blog TheLowDown (TLD) (including this post). We have visited Temu’s operating headquarters, and we could feel that culture quite strongly by just a few hours of interactions there. In the same 2018 investor letter, Colin Huang stressed that Pinduoduo’s core value is “本分” (Ben Fen), a term that he admitted was difficult to express perfectly in English. However, he highlighted that for Pinduoduo, Ben Fen meant “to relentlessly focus on value creation for our consumers. We may not always be understood, but we always do things out of goodwill and do no evil.”;
4. PDD management has highlighted “compliance” as a big current focus for the group – we do believe that this is specifically on its global business Temu. Temu has used the “full consignment” model to achieve the initial critical mass. However, moving a massive amount of goods crossborder directly to consumers is politically sensitive, and often limited by infrastructure. For example, customs clearance capacity in South Korea has reached its limit thanks to Temu;
5. Therefore, for Temu to further grow, it will have to open up to more local sellers (or locally stored goods) in the key markets. In March, they launched “half consignment” in the US, allowing sellers in the country to directly ship from their warehouses without going through the platform. Competitors such as SHEIN have followed suit. Eventually cross border might not be the majority of Temu’s GMV;
6. According to data tracking and calculations by a few China-based analysts, Temu is probably very close to (or have already reached) breakeven point. As Pinduoduo continues to rein in sales & marketing costs, while at the same time opening up more models such as “half consignment” might further enhance customer retention, Temu’s bottomline can improve further;
7. Competitors of Temu, including Amazon in the US and Shopee in Southeast Asia, should watch out, even if Temu is not biting yet (for example in Southeast Asia);
8. On China’s market, PDD management mentioned that consumers had already formed the habit of checking across platforms, comparing selection, pricing and service before deciding where to buy. They also mentioned that competitors “obviously increased their investment”. Pinduoduo has an advantage of operating more efficiently, but Alibaba and JD have been working very hard to defend their market share. Consumer shopping experience will continue to evolve (for the better) as a result of this relentless competition;
9. Two key parts in one of Chen Lei’s comments during the earnings call probably sums everything well: “We are a company that focuses heavily on execution and after setting a strategic direction, we’ll do our best to execute.”

Read our Who is Temu report for more structured analysis of Temu’s business model, and follow our various articles on Temu published on TheLowDown.