PDD Holdings

PDD Holdings' online marketing services revenue grew 3% year on year in the second quarter, while transaction services revenue growth decelerated to 13% from 20% in the first quarter. EBIT margin improved to 24.7% from 18.4% sequentially. EBIT grew 8%.

Why it matters: OMSR growth was in line with our expectation, trailing DataBurning's estimated growth of 8% at the domestic e-commerce platform Pinduoduo. We estimate monetization continued its sequential recovery trend in the quarter. On our estimate, monetization at Pinduoduo was lower than the year-ago period due to stricter e-commerce regulations, weak macroeconomics, and competition. TSR growth indicates that Temu, the main growth driver at PDD, is slowing down faster than we expected. We assumed higher governance and compliance costs for Temu, but these costs track below our expectations. Management guided that the European Union's duty on low-value cross-border consignments would put pressure on volume and cost in the near term, which will put pressure on TSR growth and margins.

The bottom line: We maintain our fair value estimate of USD 141 per share for narrow-moat PDD, as our TSR estimate cut was offset by lower cost estimates. The shares are undervalued in our view. The market is concerned about lackluster growth at Pinduoduo and the geopolitical risks Temu faces. While we think Pinduoduo has reached a mature stage, we think Temu's eventual turnaround can offer long-term upside. Our confidence in Temu's future potential is based on PDD's track record in rapidly adapting to changing geopolitical risks, such as US tariffs, in the past.

Key stats: PDD had CNY 452 billion net cash as of June 30. As its growth slows, we believe less capital is needed for operations. We think PDD should start to return capital to shareholders. This will improve corporate governance and investors' interest in PDD.

Our fair value estimate is USD 141 per ADS. Our valuation implies 12 times the 2026 P/E ratio.

We forecast PDD’s China and Temu GMV to rise at a CAGR of 4% and 6% in the next decade, helped by increasing shopping frequencies and spending per buyer. Its successful team purchase model and subsidies will help lift GMV and ARPU. Total revenue, online marketing revenue (50% of revenue in 2025), and transaction services revenue will increase at 4%, 3%, and 5% CAGRs, respectively, in the next decade.

We expect PDD’s operating margin to reach 15.8% by the end of the decade from 21.9% in 2025 due to investment in Pinduoduo and the rising contribution of lower-margin Temu.

Narrow-moat PDD Holdings' moat source is the self-reinforcing network effect supported by its massive user and merchant scale in its China e-commerce business, Pinduoduo. In our view, the network effect is powerful enough to protect PDD from competition and maintain its excess returns for the next 10 years.

With over 700 million monthly active users in China's mobile internet industry, the Pinduoduo platform attracts over 16 million merchants, according to QuestMobile. Pinduoduo had the sixth-highest number of monthly active users in China's mobile internet sector, and the second-highest MAU in China's e-commerce sector, only second to the over 900 million MAU at Alibaba’s Taobao in the first half of 2026. As the number of merchants increases, competition for buyers increases, leading to products being offered across a wider variety of categories and at more competitive prices. We expect this will continue to moderately increase the number of active buyers, as well as order volume per user and spending per user despite the high maturity of the e-commerce industry in China.

We also see a network effect with PDD’s team purchase model. These users can enjoy more attractive prices available under the “team purchase” option. As the user base expands, the ease of forming teams increases, which dramatically reduces wait times and raises transaction completion rates. This transaction velocity generates highly valuable consumer demand data, which PDD shares with merchants to optimize product curation, enhancing merchant stickiness. This leads to improved demand for its online marketing and other services by the merchants, which are the means to monetize the network. The domestic e-commerce platform’s monetization rate (the percentage of revenue the company can monetize from its GMV) is largely similar to Alibaba, which has the highest gross merchandise volume in China, in our estimate. Such a high monetization rate has driven robust domestic operating profitability and strong cash flows, which comfortably cover PDD's cost of capital and support the narrow-moat rating.

We do not expect emerging short-form video platforms like Douyin or Kuaishou to dismantle PDD's domestic moat. While content-driven and livestreaming e-commerce have grown rapidly, they primarily satisfy impulse purchases rather than planned, search-based shopping. Return rates in livestreaming remain prohibitively high—often 30%-40% compared with typical single-digit rates for traditional e-commerce—due to the impulsive nature of the transactions. This high return rate and sales volatility make it difficult for brands and manufacturers to plan production or achieve economies of scale, limiting livestreaming to a complementary channel rather than a full replacement for PDD's high-efficiency, search-and-team-based value model. Even as Douyin expands search-based commerce, its platform lacks PDD's dedicated merchant density and ultra-low cost structures, leaving PDD's narrow moat intact.

PDD’s faster-growing international segment, Temu, currently does not possess a moat. We don't yet have confidence that Temu has a network effect that can help it to generate excess return for the next decade. Given the rising protectionalism globally, new trade policies unfavorable to PDD are unpredictable. This doesn’t undermine PDD’s moat, as the domestic business generates strong ROIC which is sufficient to offset the losses in Temu.

Temu might break even faster than anticipated while maintaining an above-industry growth rate.

Despite concerns such as higher import taxes in the US for Temu, PDD could deliver better-than-expected overseas sales due to its strong adaptability.

If PDD successfully adopts generative AI in its platform, it could help customers buy products that meet their specific demands better than its peers, leading to market share gain.

If Temu loses its growth momentum faster than expected due to competition, it could lead to slow revenue growth for PDD.

Peers can recruit and maintain a vast majority of the merchants offering price-competitive products from Pinduoduo, leading to falling market share for the firm.

As the middle- and upper-income classes in China grow and the economy recovers, demand for rapid delivery becomes the dominant consumption trend. This benefits JD.com more than Pinduoduo, which focuses on value-for-money products.