PDD Holdings (PDD), the company behind discount shopping app Temu, saw its shares slide in premarket trading Tuesday after delivering a reality check alongside its third-quarter earnings. Yes, the numbers looked fine on the surface—but it's the commentary that has investors worried.
The Chinese e-commerce giant reported revenue of $15.21 billion (108.28 billion yuan) for the fiscal third quarter, up 9% year-over-year and right in line with what analysts expected. Breaking that down, online marketing services and other revenues climbed 8% to $7.49 billion, while transaction services grew 10% to $7.72 billion.
On the earnings front, PDD posted adjusted earnings per ADS of $2.96 (21.08 yuan), which actually beat the analyst consensus of $1.99. So far, so good, right?
Here's where it gets interesting. The company's cost structure tells a different story. Total costs of revenues jumped 18% to $6.58 billion, significantly outpacing revenue growth. The culprits? Higher fulfillment fees, bandwidth and server costs, and payment processing fees—the unglamorous infrastructure expenses that come with running a massive online marketplace. Operating expenses, meanwhile, rose a more modest 3% to $5.11 billion.
The result: adjusted operating profit barely budged, rising just 1.2% to $3.80 billion. More telling is what happened to margins. The adjusted operating margin compressed from 26.9% a year ago to 25.0% this quarter. When your margins are shrinking while you're still growing, it usually means you're facing tougher competition or investing heavily for the future—or both.
Jun Liu, Vice President of Finance, didn't sugarcoat things: "In the third quarter, revenues growth continued to moderate, reflecting the ongoing evolution of the competitive landscape and external uncertainties." Translation: the market is getting tougher, and growth isn't coming as easily as it used to.
Liu added that increased merchant support and ecosystem investments may result in financial fluctuations from quarter to quarter—essentially warning investors not to expect smooth sailing ahead.
On the balance sheet side, PDD remains flush with cash, holding $59.5 billion in cash and equivalents as of September 30. The company generated $6.41 billion in operating cash flow during the quarter, so it's not like they're running out of runway to navigate these challenges.
Still, the market reacted to the cautious tone. PDD stock traded down 3.93% to $123.97 in premarket trading Tuesday as investors digested the company's more subdued outlook.
