PDD's Radical Cutback Frenzy: Profit Plunge Masks Bold Strategic Gambit?

On the evening of May 27, before the US stock market opened,$PDD(PDD.US) released its Q1 2025 financial report, once again showing a 'familiar' 'bomb' performance, with a plunge after the earnings release. Where did the problem arise this time?

1. Revenue and profit both missed again: Overall, Pinduoduo's total revenue this quarter was about 95.7 billion RMB, a year-on-year increase of 10%. It missed significantly again, falling nearly 6 billion short of market expectations. In terms of trend, it is just one step away from single-digit growth, officially entering a low-growth phase.

The profit issue is even more severe. This quarter's operating profit was 18.3 billion, a year-on-year plunge of about 38%, exceeding the sell-side expectations by more than 9 billion, which can be considered a 'bomb'.

2. Core advertising revenue is not bad: However, the advertising revenue mainly reflecting the main site situation is not bad. This quarter's actual year-on-year growth was 14.8%, slightly exceeding the market's expected growth rate of 13%. Although in terms of trend, due to the decline in monetization rate, the growth rate is marginally slowing. But combined with the 'huge' marketing expenses discussed later, it can be seen that some main site growth was regained through subsidies.

3. The noise of commission income affected by Temu is too large: The total revenue this quarter fell short of expectations, mainly due to the commission income affected by Temu. This quarter's commission income was actually about 47 billion, more than 7 billion below market expectations. It should still be mainly due to the impact of Temu's business structure changes (rapid transition from full custody to semi-custody under tariff impact), as well as the impact of commission reductions for domestic main site merchants. (For detailed explanation, please see the text)

4. Gross profit this quarter was actually 54.7 billion, also 5 billion below market expectations. But similarly, the main cause should also be the aforementioned underestimation of the impact of the semi-custody model. Of course, the decline in the main site's monetization rate (due to fee reductions or subsidies for merchants) is also one of the negative drags.

5. The surge in marketing expenses is the real Achilles' heel: This quarter's marketing expenses reached 33.4 billion, an increase of nearly 10 billion compared to the same period last year, and even more than the spending during the Double Eleven peak season in Q4, an unprecedented level of investment.

6. Plummeting profits: As mentioned earlier, this quarter's operating profit plunged 38% year-on-year, undoubtedly very poor. Moreover, according to Dolphin's own forecast, the revenue and gross profit are basically consistent with the actual situation, the only gap is in marketing expenses and profits, which also shows that the Achilles' heel of this profit plunge is the surge in marketing investment.

The company has reinvested a large amount of profits back to users (reflected in marketing expenses) and merchants (reflected in the decline in monetization rate) through subsidies.

Dolphin Research's view:

Although Dolphin had expected that Pinduoduo's performance would not be good in the near future, the company's profit collapse to this extent is still very exaggerated, even for a company like Pinduoduo that often 'silently goes crazy'!

This quarter's revenue looks average due to the interference of Temu's transaction commission income, and the so-called exceeding or not exceeding can be seen as noise to some extent. At this price level, the market did not give Temu a valuation.

Therefore, the key advertising and marketing revenue reflecting the domestic main site—this quarter's year-on-year growth of nearly 15%—indicates that its domestic main site revenue growth is not bad.

In terms of expenses, the company's internal 'human mine' employment method means that the company's R&D and administration cannot be too high. Especially administrative expenses, which even showed negative growth this quarter. In the AI era, a 23% year-on-year increase in R&D can also be said to be an appropriate level of investment.
So the key issue this quarter is focused on marketing expenses: 33.4 billion in marketing expenses, even compared to last year's Q4 e-commerce peak season, it increased by more than 2 billion! Such seasonal user subsidies have never occurred even during Pinduoduo's rapid growth period after its listing.

Because Pinduoduo is a platform business model, subsidies to users should generally be recorded as advertising expenses; while subsidies to merchants should be recorded as a deduction from income. Even the company's previous high-profile '100 billion support' for merchants would not mainly be reflected in sales expenses. (Mainly reflected in the deduction from income, i.e., the decline in monetization rate)

Therefore, it is very clear that the biggest problem this time is the absolute value of marketing expenses being too exaggerated. It should be that while JD and Alibaba are fully utilizing national subsidies, Pinduoduo may be using both national subsidies and its own funds to subsidize users with real money.

So, how should this problem be understood?

The current situation is that the company's Temu overseas imagination has failed, domestic business growth is gradually mediocre, and competition is not slowing down at all, and there are no high-return potential investment opportunities in the short term. Meanwhile, the company's net cash accounts for almost one-third of its market value, with a large amount of funds 'lying' on the books. In this situation, Pinduoduo faces a choice:

a. Gradually bow down and slowly admit that the business has entered a mature stage amid repeated denials. In terms of capital allocation, it means—low growth paired with good shareholder returns. At least start by repurchasing to ensure that the share capital no longer grows net due to equity incentives. Otherwise, in the ROE per share, the numerator grows slowly while the denominator continues to accumulate, and ROE will continue to decline.

b. In the case of low domestic growth and strong competition, and no good investment opportunities overseas, reinvest the funds back to users and merchants. That is, the earned income and profits are not used to reward shareholders, but directly turned into marketing investment and commission reductions on the expenditure side to subsidize users or merchants.

It is very clear that between shareholders and users (of course, the company will say it is long-term value), Pinduoduo has currently chosen the latter without hesitation. This answers the question investors are closely watching—how Pinduoduo, after falling into slow growth, allocates the cash on its books.

So, how should Pinduoduo's choice be understood in essence? Dolphin's understanding of this issue is:

In the end, the Chinese e-commerce track is still the 'God-damn retail business' that Munger talked about—strong competition, weak barriers, and low valuation. Ultimately, the one that can stand out is the one that rolls and rolls to the extreme efficiency.

In the short term, Pinduoduo's choice basically means that this year's e-commerce has started a new round of stock competition! This choice is a valuation suppression for peers.

Currently, the company is looking at a low valuation of 10XPE, but if it continues to subsidize like this, the so-called profit 'E' cannot stand at all. As profits decline, the valuation will become more expensive, so whether the short-term valuation is low or high is not very meaningful.

In this case, Pinduoduo's valuation still needs to be understood beyond short-term competition. What is the core of e-commerce competition?

Dolphin's understanding is that e-commerce has become an ordinary retail business, and the ultimate competition in retail business is efficiency. If Pinduoduo is the second most efficient in e-commerce, I am afraid no one dares to say they are the first.

Looking beyond short-term competition, Pinduoduo's 330 billion in cash and cash equivalents, with a market value of 1 trillion RMB after the fall, if following the choice of a conventional company, with last year's normal annual profit release of 120 billion, the company's cash is enough to buy itself back and delist in about 5-6 years.

Therefore, behind Pinduoduo's profit avalanche, Dolphin sees it more as a kind of performance 'self-harm' that begins to face the issue of shareholder returns, affecting the short-term competitive landscape but not affecting its long-term investment logic.

So this performance is going to plummet, but after falling below 1 trillion RMB, with the long-term logic unaffected, how much further downside space is there? Dolphin thinks it is actually not much.

Detailed interpretation of this quarter's financial report:

1. Revenue missed again and again, still a misjudgment of commission income

This quarter, Pinduoduo's total revenue was about 95.7 billion RMB, a year-on-year increase of 10%. From the perspective of expectation difference, it once again significantly fell short of market expectations, missing by nearly 6 billion, marking the third consecutive quarter of revenue falling short of expectations. In terms of trend, the growth rate is just one step away from single-digit %, marking Pinduoduo's official entry into a mature, low-growth stage.

Similar to the previous quarter, the advertising revenue mainly reflecting the main site situation was within expectations, and the difficult-to-grasp commission income (affected by Temu) caused the expectation difference.

In terms of advertising revenue, this quarter's year-on-year growth was 14.8%, slightly exceeding the market's expected growth rate of 13%. The performance is not bad, combined with the 'huge' marketing expenses discussed later, it can be seen that some main site growth was regained through subsidies.

As for transaction commission income, this quarter's was about 47 billion, more than 7 billion below market expectations. According to Dolphin Research's judgment, it should mainly be due to Temu's faster-than-expected transition from full custody to semi-custody. A detailed explanation will be provided later.

Setting aside the expectation difference, although this quarter's advertising revenue slightly exceeded expectations, the trend still shows a decline from 17% last quarter to less than 15%, still reflecting that Pinduoduo's main site's GMV growth rate may be continuing to slow down, and its advertising monetization rate is further declining year-on-year. Among them, the latter's impact of declining monetization rate may be greater, which also aligns with Pinduoduo's strategic direction of reducing merchant operating costs. (The backlash of raising the monetization rate too quickly and too high previously)

2. Commission income missed significantly, should be due to Temu's accelerated transition to semi-custody

Although this commission income once again had a huge gap with Bloomberg's consensus expectations, it coincidentally aligned with Dolphin Research's pre-earnings expectations. Therefore, based on our prediction logic, this time it should still be mainly due to the impact of Temu's business structure changes (transition from full custody to semi-custody under tariff impact), with the impact of domestic main site merchant commissions as a supplement.

Due to the impact and expectations of Trump's tariffs and the cancellation of small package tax exemption policies (the policy was not officially announced in Q1), Temu's operating model underwent significant changes in the short term. Coupled with the lack of official data, the differences in third-party research data are also very large, making it impossible to accurately restore Temu's current actual situation.

But according to our predictions, which happen to be very close to the actual situation, Dolphin believes the following directional judgments should be referenced:

① Temu's overall GMV scale this quarter is likely to have decreased significantly compared to Q4 (due to tariff and other policy impacts, as well as seasonal impacts from the peak season in Q4 to the off-season in Q1).

② Due to expectations of US policy suppression, Temu's transition from full custody to semi-custody should be much faster than sell-side expectations. According to Dolphin's rough estimate, the proportion of semi-custody business orders may have reached about 20%. And because full custody business is recorded as revenue on a full-caliber basis (sales price - cost), while semi-custody is recorded as revenue on a net commission basis, it will lead to a significant decline in recognized revenue on the financial statements.

③ At the same time, according to our estimates, in addition to the significant decline in business volume on a quarter-on-quarter basis, the average product markup rate (i.e., the part recorded as revenue by the company) under the full custody model may also have decreased on a quarter-on-quarter basis (such as the impact of rising costs like customs clearance). However, Dolphin's confidence in this point is not high.

3. Gross profit is low, should still be mainly due to misjudgment of Temu's impact

In terms of gross profit, Pinduoduo's gross profit this quarter was 54.7 billion, also 5 billion below market expectations. But similarly, Dolphin's pre-earnings forecast for gross profit was basically consistent with the actual situation. Therefore, the main cause of falling short of expectations may also be that the sell-side overestimated Temu's total GMV scale this quarter, while underestimating the proportion of the semi-custody model. In addition, due to the decline in the main site's monetization rate (due to fee reductions or subsidies for merchants), expenses are increasing, which is also a negative drag on gross profit.

In terms of gross margin, this quarter's was 57.2%, a slight increase from the previous quarter, also indirectly verifying the increase in the proportion of the higher gross margin semi-custody model.

4. Marketing expenses surged, the real Achilles' heel this time

The above revenue shortfall issues are mostly due to the inability to accurately grasp Temu's income, which can be seen as noise to some extent in this performance.

In terms of expense spending, the surge in marketing expenses this quarter, which far exceeded expectations, is the key Achilles' heel of this performance bomb. Specifically, this quarter's marketing expenses reached 33.4 billion, an increase of nearly 10 billion compared to the same period last year, and even higher than the marketing expenses during the Double Eleven peak season in Q4, also far exceeding the market's expected 28.9 billion spending. From various angles, this quarter's marketing spending can be described as 'exaggerated', reflecting that Pinduoduo conducted quite aggressive subsidies.

Due to the impact of tariff policies, Temu's marketing expenses this quarter should have narrowed significantly, so the surge in marketing expenses can only be attributed to very aggressive subsidies on the domestic main site. After encountering obstacles in overseas business, the company has refocused its investment on the domestic main site. When the main site growth continues to slow down and 'becomes ordinary', there is an intention to regain growth through massive subsidies.

As for other expenses, administrative expenses showed negative growth, and in the AI era, a 23% year-on-year increase in R&D expenses is not considered excessive investment. The only issue is with marketing expenses.

5. Profit plummeted!

Finally, in terms of profit, the overall operating profit was 18.3 billion, a year-on-year plunge of about 38%, more than 9 billion below sell-side expectations, undoubtedly a 'bomb' level of poor performance. The operating profit margin also fell below 16.8% for the first time in nearly 3 years.

Due to Temu being in a contraction state under policy impact, the losses it caused should have narrowed significantly this quarter, so the main reason for the profit plunge is that the company reinvested a large amount of profits back to users (reflected in marketing expenses) and merchants (reflected in the decline in monetization rate) through subsidies.

From the perspective of expectation difference, because Dolphin's own forecast for revenue and gross profit is basically consistent with the actual situation. The only gap is in marketing expenses and profits, which also shows that the Achilles' heel of this profit plunge is the surge in marketing investment.