Temu parent’s share price drops ~30%: our thoughts

Yesterday (26 August), Temu’s parent company PDD Holdings released its Q2 2024 results. Revenue missed analyst consensus while profit beat expectations.

Stock prices started sliding down in the pre-market. However, it was the remarks by the Co-CEO Chen Lei during the earnings call that truly spooked investors. He “made it clear to investors” that “in the long run, the decline in profitability is inevitable”, and added competition in its global business faces a “rapid shift in external environment”, and “significantly greater uncertainty”. Chen Lei also highlighted that the competition PDD faces is growing stronger, “is here to stay” and “is expected to intensify”.

Therefore, the management has reached a unanimous decision that the next few years are “not appropriate” for dividends and share repurchases.

By the end of the trading day, PDD’s share price dropped 28.51% to (interestingly) exactly $100.

Some of our thoughts: 

1. The results are not that bad, with a solid net income of CNY 32 billion (US$4.5 billion) for the quarter. However, the management’s prepared remarks sounded almost deliberately trying to drive the share price down;
2. This behaviour is very unusual – management of most listed companies see lifting of stock price as a market testament of their performance. Only people like Elon Musk would do otherwise. (Musk tweeted “Tesla’s stock price is too high imo” in 2020, sending the price down by 10%);
   
3. The question is why PDD management would do that. Theories abound, from deepened economic problems in China, government pressure to recent seller protests (which led to some sellers storming the Temu office). Some investors even speculated that PDD “engineered” missing the revenue target – “great and precise execution”, someone told us and we could not tell whether he was joking;
   
4. A more interesting guess is that PDD founder Colin Huang does not want to be the richest person in China. This is actually quite plausible for anyone familiar with the history of China;
   
5. What management said about the external environment, non-business factors impacting the business, and intensifying competition is all true. As a matter of fact, it is what most companies face after a good run of profit growth. When this happens, it is quite hard for the leadership to manage all the expectations: of investors, of employees at various levels, and of suppliers as well as customers; 
6. What sets PDD apart from many other companies is the coherence of its leadership, people and organisation. This makes the company’s (incl. Temu’s) execution focused, efficient and hard to catch up with; 
7. It is also worth revisiting what the management said in the previous earnings call (Q1 2024). You will find that they were already giving the warnings that good profits would not last, and the company knew what to do: “We are a company that focuses heavily on execution and after setting a strategic direction, we’ll do our best to execute.”
   
8. Companies competing against Temu, or foreseeing Temu’s entry into their markets, should embrace that. They need to think deeply about what to leverage to put up a strong defence, or offence. 
9. In that regard, nothing is better than closely observing how incumbent marketplaces such as Alibaba have been doing to defend market share in a war of attrition. 

Temu will enter more countries in Southeast Asia, and is deepening its hold in markets such as Europe and North America where it had a good head start. Momentum Works will release a sequel of “Who is Temu” next month, stay tuned!