PDD Margins Fall On Strategic Spending — Analyst Sees Long-Term Upside, But Payoff Timing Unclear

PDD Holdings PDD stock is trading lower on Wednesday after the company reported worse-than-expected first-quarter financial results on Tuesday.

The company reported fiscal first-quarter 2025 revenue growth of 10% to $13.18 billion (95.67 billion Chinese yuan), missing the analyst consensus estimate of $14.17 billion. The adjusted operating margin plunged from 32.9% to 19.1% Y/Y.

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The Chinese online retailer’s adjusted earnings per ADS of $1.56 (11.41 Chinese yuan) decreased from $2.86 (20.72 Chinese yuan) Y/Y, missing the analyst consensus estimate of $2.49. 

Wall Street analysts rerated the stock on Wednesday, downgrading the rating and cutting down on their price targets.

Benchmark analyst Fawne Jiang maintained PDD Holdings with a Buy and lowered the price target from $160 to $128.

PDD’s first-quarter results revealed that domestic e-commerce growth was roughly in line with expectations, while international revenue came in below forecast. Jiang noted that this miss was largely anticipated amid ongoing tariff tensions.

Despite signs of reduced U.S. ad spending, PDD ramped up investment in merchant support considerably, leading to a pronounced margin decline in the first quarter, the analyst noted.

Moreover, he said management characterized this spending as part of a longer-term investment cycle focused on strengthening the merchant ecosystem.

Given the margin compression and elevated strategic outlays, Jiang expects material downward earnings revisions, especially since the duration and payoff timeline of this investment cycle remains uncertain.

Coupled with fluid global trade dynamics, the analyst noted the stock will likely remain under pressure soon.

Jiang continues to see the potential for PDD to grow earnings in the mid-teens over a normalized cycle, and the current valuation reflects a depressed scenario.

While the investment narrative is shifting, the analyst noted management’s actions as primarily defensive amid intensifying competition, with some discretionary flexibility still intact.

Jiang said that PDD is navigating a challenging environment shaped by intensifying domestic competition, rising merchant costs due to policy headwinds such as tariffs, and the growing need for substantial investments to support merchant adaptability and long-term growth. In response, the analyst noted that the company is doubling on ecosystem expansion, broadening product offerings, enhancing supply chain capabilities, and accelerating digital transformation to improve operational efficiency and service quality.

In the near term, however, Jiang expects PDD’s elevated strategic investments in merchant and consumer support to weigh on margins, given the scale of these initiatives and the inherent lag between investment and returns.

With PDD’s highly efficient, data-driven, and value-oriented e-commerce platform, Jiang continues to see the potential for mid-teen earnings growth in a more normalized environment.

Jiang revised his fiscal 2025 and 2026 revenue estimates to 427 billion Chinese yuan (+8% Y/Y) and 495 billion Chinese yuan (+16% Y/Y), reflecting softer growth momentum and near-term macro and policy headwinds.

As a result, his updated adjusted EPADS estimates are $7.63 for fiscal 2025 and $8.59 for fiscal 2026.

Price Action: PDD stock is trading lower by 3.83% to $99.03 at last check Wednesday.

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