2024 Q4 PDD financial report interpretation: A rare sight

After the management team stated in the earnings call following the Q2 2024 report that the company's rapid growth is unsustainable and that there will be many difficulties in going overseas:

"I want to make it clear to our investors that starting from the third quarter, profits will gradually show a downward trend... In the long run, a decline in profitability is inevitable."

"Our global business faces significant uncertainties brought about by fierce competition in a constantly changing external environment... The high growth of revenue is unsustainable, and the trend of declining profitability is unavoidable."

It has been proven that Chen Lei's words were not alarmist. Q2 was the peak of profitability in history, with the company's Non-GAAP operating profit for Q3 at 26.77 billion, a quarter-on-quarter decrease of 23.5%. In Q4, this figure was 28 billion, a quarter-on-quarter increase of 4.6%, but still 20% lower than Q2.

Considering that Q4 is the traditional peak season for e-commerce, and peers Alibaba and JD.com have achieved relatively good performance, PDD's profitability cannot be considered outstanding.

However, who can say that this is not the result PDD wanted, after all, they had already forecasted it six months ago.

Total revenue was 110.61 billion, falling short of the market expectation of 115.8 billion, with a year-on-year growth rate of 24%, the second lowest in history, only higher than Q1 2022. In Q1 2020, the company also had a revenue growth rate of 44%, and the low growth rates in the aforementioned two quarters were due to the pandemic.

The part that determines PDD's "cash ability" is its online marketing revenue, which was 57.01 billion this quarter, a year-on-year increase of 17%, falling below 20% for the first time in a normal quarter; commission income was 33%, with last quarter's growth rate still at 72%, and in Q1 it was as high as 327%.

PDD has always favored a high-margin business model. Even while vigorously developing community group buying and TEMU, its gross margin has never fallen below 60%, as both of these businesses involve warehousing and supply chains, which are heavier models, making it normal for gross margins to be lower. In Q3 2024, the gross margin fell to the 60% line, continuing to decline by 3.2 percentage points this quarter, down to 56.8%, possibly the lowest in history. Since the second half of 2024, TEMU has faced geopolitical headwinds, and to mitigate risks, TEMU has adjusted its strategy, partially shifting to a semi-managed model. Under this model, there is a need to increase the construction of overseas warehousing and supply chains, while the revenue model may shift from the net method (retail price minus supply price) to the commission method, resulting in a sharp decline in revenue growth and a surge in costsThe growth rate of core online influencer service revenue has slowed to 17%, down from 56% in the first quarter, 29% in the second quarter, and 24% in the third quarter. The reasons for this slowdown include:

1. The full-site promotion model significantly improved the advertising monetization rate. This model was launched in February 2022 and gradually expanded its coverage each quarter. Therefore, we can see that PDD's online marketing service revenue began to accelerate from Q1 2022, as shown in the chart below:

The acceleration process continued until Q1 2024, completing a two-year cycle, and the penetration rate of this service is basically complete. Thus, it is normal for the growth rate to return close to the GMV growth rate.

1. As is well known, after the Q2 financial report, all platform e-commerce, including PDD, increased merchant subsidies, with advertising subsidies being an important method.

2. Under normal circumstances, PDD (as well as other mainstream e-commerce platforms) would see advertising revenue growth slightly faster than GMV growth by a few percentage points. Quarterly data may have volatility, but annual data is more persuasive, as shown in the chart below.

In 2017-2018, PDD's advertising system had just started, so the growth rate of marketing service revenue was much faster than that of GMV.

From 2019 to 2021, during PDD's high growth period, its marketing service growth rate was 5-20 percentage points faster than GMV growth, which is a normal phenomenon during the platform's dividend period.

Since 2022, strictly speaking, until Q1 2024, the gap between PDD's marketing service growth rate and GMV growth rate has widened—normally, as the platform scales up, the growth rate of marketing services should become closer to the GMV growth rate—primarily due to the aforementioned full-site promotion model advancement.

As for commission service revenue, there have historically been many variables affecting the growth rate of this segment, mainly including the gradual collection of 0.5%-2% commission on the 100 billion subsidy, and the revenue from community group buying and TEMU business also counted in the commission service segment. Of course, the advertising revenue from these two segments is included in online marketing service revenue, but their advertising revenue can almost be ignored, at least at this stage.

Therefore, we see that the volatility of commission service revenue is very high, and currently, this segment's revenue has sharply decreased from 327% in the first quarter to 33%. The reasons also include merchant subsidies (rebates), a decline in the growth rate of the business itself (higher base, geopolitical factors, overall industry slowdown).

Overall, we believe that PDD's current business performance is completely reasonable, whether from the macro environment, industry competition trends, or the platform's own commercialization potential. The slowdown of PDD is a wise moveSo, the performance of this financial report is actually not particularly surprising. In short:

The slowdown in GMV is completely normal and still exceeds expectations, as the overall growth rate for 2024 is still more than three times that of the industry;

The slowdown in revenue is not only reasonable but also completely politically correct;

The slowdown in profit has both artificial factors and objective background.

The total revenue for 2024 is expected to be 393.8 billion, a year-on-year increase of 59%; the Non-GAAP profit attributable to ordinary shareholders is expected to reach 122.3 billion, a year-on-year increase of 80%.

PDD currently has a market value of 174.87 billion USD, down 6.3% in pre-market trading, corresponding to 163.85 billion. Based on the net profit for 2024, the static PE is 9.7 times.

TEMU's GMV for 2024 is approximately 55 billion USD, with a monetization rate of about 30% (as most adopt the net method), resulting in revenue of about 16.5 billion USD, or approximately 119.6 billion. The community group buying business, Duoduo Maicai, has revenue of about 30 billion, while the main site commission income is about 46.3 billion.

The main site commission + advertising annual revenue is approximately 244.2 billion, while Alibaba's core e-commerce customer management revenue during the same period is 314.84 billion. Looking solely at this part of the business, the gross profit margin is as high as 90%, and the EBITA profit margin can reach around 70%. Alibaba's Taotian Group still has an EBITA profit margin exceeding 60%. However, Taotian Group, in addition to core customer management income, also has direct-operated businesses like Tmall Supermarket and Tmall Global, which may not be profitable or have very thin profit margins. It can be estimated that PDD's main site commission + advertising revenue EBITA should be between 65%-70%, approximately 158.7-170.9 billion, taking the middle value of about 165 billion. After deducting taxes, the net profit is about 150 billion. The community group buying business has basically reached breakeven, with a maximum loss of 2-3 billion a year, which suggests that TEMU is currently losing about 3.5 billion USD.

There is no doubt that the market is currently pricing TEMU at a negative valuation, and the same may be true for community group buying.

If we exclude the impact of TEMU and community group buying, PDD's main site business has a static PE of about 7.9 for 2024, which is simply: cheap.

Unexpectedly, PDD has become a company characterized by a low stock price, which is quite a sight to behold.

However, dynamically, the changes in revenue and profit in 2025 will determine whether PDD's valuation will become increasingly cheaper.

PDD's operating expenses are worth noting; if I'm not mistaken, there may be new trends in this area.

Thanks to the leverage effect of economies of scale, PDD's administrative expenses have consistently performed exceptionally well, with the revenue share of administrative expenses decreasing from 4% to around 2%Moreover, we need to know that since 2022, PDD has significantly increased its community group buying and international business while its main site business scale (revenue) has grown several times, yet its total administrative expenses have hardly changed, which is truly impressive.

In the past nine quarters, marketing expenses have increased by 76.9%, but during the same period, revenue has grown by 178.1%, indicating that the company's marketing expenditure ROI is very strong. The ratio of marketing expenses to revenue has also decreased from 44.6% two years ago to 28.4%.

PDD's R&D expenditure has been increasing quarter-on-quarter, but as of Q3 2024, this incremental absolute value is not significant, especially considering its rapid revenue growth, which certainly reflects the company's restraint in spending and may also reflect its confidence in its technological competitive advantage.

However, in Q4 2024, R&D expenditure suddenly increased by 720 million, which has little to do with seasonality, as there are no signs that PDD had a sharp increase in R&D spending in previous years' fourth quarters.

What I understand is that since last year's fourth quarter, PDD has recruited many R&D personnel from an established search giant and has maintained its consistent high-salary poaching style.

In fact, recommendation algorithms are an intermediate state of internet search and AI, and technically, they have a competitive advantage over traditional internet.

PDD is not a company that likes to chase trends; after nearly 20 years of e-commerce development, it has only begun to enter a nearly saturated market and take the lead.

I guess PDD has also realized that the e-commerce industry has reached a technological generational shift, and it is time to bet on AI.

However, given PDD's consistent cautious approach, they probably won't talk much about AI in their earnings call, but we should focus on what they do rather than what they say.

Since I have not yet attended the earnings conference and do not know what the company specifically said, the above analysis is for my own investment tracking and should not be considered as investment advice. Please be aware.

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account individual users' specific investment goals, financial conditions, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk