Can Pinduoduo (Temu) transform from a caterpillar into a butterfly?

After PDD released its quarterly results, its stock value dived more than 30%. PDD's results were impressive, with revenue and operational profit growing by 86% and 156%, respectively. However, isolated revenue for advertising (domestic business) and transaction services (mostly Temu) missed analysts' expectations, and month-on-month revenue growth showed a downward trend.

Management warned about future profitability as PDD's business faced rapidly changing environments (we covered some in linkedin.com/company/te… report Temu Watch #2). PDD announced it would not repurchase or distribute dividends because it faced fierce competition and was still in the investment stage.

In 2021, five years after its founding and three years after its IPO, PDD became profitable. Still, it has never repurchased stock or paid dividends, consistently using earnings to subsidize users and develop agricultural research. Now that low-price competition has intensified (see our note of last week), PDD is focusing on improving the quality of merchants and products. Some might say it's high time...

PDD wants to improve its platform ecology through a combination of "support and governance." It will sacrifice short-term profits for long-term investments. In the coming year, it will invest tens of billions of yuan on developing new merchants and reducing fees for high-quality merchants. It will also crack down on illegal activities.

This development is logical now that the years of easy growth in e-commerce have passed, market penetration is hitting a ceiling, and competition is more fierce. To maintain or grow its market position, PDD must service both the demand side (consumers) and the supply side (merchants).

Since 2023, PDD has worked on implementing high-quality development in all its aspects, such as platform governance, merchant ecology, a high-quality supply chain, and high-quality consumption. This means a strategic transformation from fast to stable, from speed to quality. PDD has said this is a long-term, large-scale, complex, systematic project.

PDD claims it is optimizing merchant entry and product listing, actively inspecting products through technical means (e.g., image recognition) and working with the compliance team to crack down on illegal and cheating merchants, creating a better business environment for high-quality merchants.

"On this road, we will inevitably have to pay the price of growth, but for the sake of long-term health, the management team will unite and build our platform ecosystem well."

Summary of article by 36氪未来消费.

Will it work? In all of its divisions, Pinduoduo, Duoduo Maicai and Temu, PDD has a bad reputation in terms of quality. It must convince consumers and merchants that it is a reliable commercial partner.