Natan's Notes #11: PDD, terrible management?
Welcome to Natan's Notes! A quick weekly update on the stocks that I cover, the opportunities I’m exploring, and the thinking behind my portfolio allocation.
Here’s what’s on deck this week:
A brief recap of Q2 numbers
Masterclass: How to Make a Stock Plunge After Delivering Strong Results
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A brief recap of Q2 numbers
During Q2 2025, PDD Holdings reported revenues of RMB 104B, right in line with expectations after several quarters of misses, and delivered EPS of RMB 22.1, a staggering 50% above consensus.
While part of the earnings beat was fueled by a sharp increase in interest income (nearly double from the prior quarter), a meaningful portion came from lower-than-expected operating costs.
Estimates on expenses had already been revised downward following the steep margin collapse in Q1, making the upside surprise all the more notable.
Here you can read my take on last quarter’s results:
I won’t dwell too much on numbers, but here are a few points worth keeping in mind:
Revenues in China (marketing services) grew 13%, while Transaction Services, which include Temu and Duoduo Grocery, remained flat. This growth doesn’t reflect the true GMV expansion across both China and Temu.
In China, lower monetization of the business translates into weaker reported revenue.
Temu GMV grew 30%+ compared to last year (Tech Buzz China Estimates) but the shift toward the semi-managed model means lower recognized revenue compared to the fully managed model that was more common a year ago.
Marketing expenses declined compared to Q1, likely due to reduced spending in the U.S. following the introduction of tariffs in April, as well as lower voucher distribution in China.
Following the release, the stock initially surged 10%, only to tumble to –3% by the end of the earnings call. This isn’t the first time it has happened: exactly one year ago, management managed to sink the stock by more than 30% in a very similar fashion.
Let’s take a closer look at the key takeaways from this quarter’s call.
Masterclass: How to Make a Stock Plunge After Delivering Strong Results
During the call, management repeatedly emphasized that the margins seen in Q2 are not sustainable, at least for the coming quarters.
“We do not believe this quarter’s profits are sustainable. There will be fluctuations in profitability in the coming quarters.“
This is certainly true, as ongoing investments and subsidies will continue to weigh on both revenue and, more importantly, margins.
On the other hand, considering the company’s particular communication style, it could also be a strategy to present itself favorably to the government, especially following last year’s complaints from merchants.
Another thought that naturally comes to mind is this: does it really make sense to place so much weight on the results of a single quarter, when the company operates more like a startup entirely focused on the long term?
In my view, it doesn’t. And while the market may dislike this apparent “disregard for investors,” I believe it actually makes the company far more agile in adjusting its strategy and execution, a crucial advantage in the hyper-competitive Chinese e-commerce landscape.
If we’re being honest, this “disregard for investors” has actually delivered results far superior to those of competitors.
So, are they really ignoring investors? I’ll let you be the judge, though you can probably guess my view.
To wrap up, putting full trust in a management team that isn’t exactly known for transparency was part of my original investment decision in Pinduoduo, and I currently see no reason to doubt their future execution.
Valuation, in my view, remains extremely cheap at an EV/FCF below 10 (quite remarkable considering PDD’s track record).
For this reason, I continue to hold my position and remain an opportunistic buyer should new sell-offs occur.
To dive deeper, I strongly recommend the following readings:
“The Great Wall Street - Investing in China” update on PDD Q2 2025 results:
Momentum Asia - “What should retailers do to defend against Temu?”
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Disclaimer: The information provided in this article is based on my research and is for informational purposes only. It should not be construed as financial advice. Please conduct your research before making any financial decisions. The author is not responsible for any financial losses or damages incurred as a result of following the information presented in this article.
https://substack.com/@absolutetotalcompound/note/c-152936911?r=5g11d4