A focus on growth over profit didn’t help PDD’s stock this week.
Shares of PDD Holdings (PDD 2.88%), which owns the popular online marketplace Temu, fell as much as 32.9% in trading this week, according to data provided by S&P Global Market Intelligence. The company reported earnings that showed an astounding 86% increase in revenue, but the biggest news was management saying the focus would be on growth, not profits, in the future.
PDD’s priorities
Second-quarter 2024 revenue jumped 86% to $13.6 billion, and operating profit jumped 156% to $4.48 billion.
While the results were impressive, co-CEO Jiazhen Zhao said in the earnings statement, “We are committed to transitioning toward high-quality development and fostering a sustainable ecosystem.” He went on to say there will be short-term sacrifices and profitability may decline as a result of these investments.
Temu’s new direction
PDD’s growth has been driven by Temu, and the site has become synonymous with low-cost, low-quality products. But Temu wants to make a transition from the low end of retail to a higher-quality market.
It’s not clear that it will be successful, given the brand the company has already built. And now U.S. online retailers are trying to copy the company’s marketplace by allowing retailers to sell and ship directly from overseas, avoiding many of the tariffs that larger retailers face.
While growth is great in online retail, PDD’s strategy has been to acquire a lot of its customers in foreign markets, using loopholes that could eventually close. Moving into higher-end products may sound great, but it could come with lower profits just as some of these loopholes are getting more attention. I think investors are just taking risk off the table, and that’s a good idea today.
Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
