Wall Street views on Pinduoduo's Q3 financial report: Operating profit returns to growth due to a low base, and Temu's profitability turning point is established.

Pinduoduo's latest financial report shows that Q3 operating profit achieved a year-on-year increase of 1% after several quarters of decline, reaching RMB 27.1 billion (Non-GAAP), and net profit increased by 14% year-on-year to RMB 31.4 billion. This marks a turning point in profitability. However, online marketing service revenue growth fell to single digits for the first time at 8%, significantly lower than market expectations of low double-digit growth, indicating that gross merchandise volume (GMV) growth and monetization rate were weaker than expected. After the financial report was released, the stock price dropped 6%, reflecting investors' concerns about slower growth. For this financial report, all three major Wall Street investment banks—Goldman Sachs, Morgan Stanley, and Citi—maintained a "Buy" rating for Pinduoduo, but their valuation targets diverged. Morgan Stanley maintained a price target of $148, Citi raised its target to $170, and Goldman Sachs lowered it to $147. **Analysts generally believe that Temu’s narrowing losses and the profitability turning point expected for 2026-2027 are the key factors supporting valuation.** Management reiterated during the earnings call that they will continue to invest in the platform’s ecosystem through the RMB 10 billion merchant support plan and the RMB 10 billion support project. In the short term, revenue and profit growth will remain under pressure, and profits will fluctuate quarter by quarter. However, analysts pointed out that **signs of Temu’s narrowing losses are clear, laying the foundation for future profit growth.** It's worth noting that despite profit performance exceeding market expectations, the growth of online marketing service revenue dropped to single digits at 8% for the first time, significantly below market expectations of low double-digit growth, implying that GMV growth and monetization rate may be weaker than expected. After the report, Pinduoduo’s stock fell by 6%, and investors expressed worries about slowing growth. ## Turning Point in Profitability: Operating Profit Returns to Positive Growth The most notable fact in Q3 is that operating profit halted its several-quarter year-on-year decline and achieved a 1% positive growth. This improvement is mainly thanks to a lower base of comparison and stable sales & marketing expenses. On a Non-GAAP basis, net profit grew by 14% YoY to RMB 31.4 billion, beating market expectations. Morgan Stanley especially emphasizes that this trend of improvement will continue into Q4 2025 and all of 2026, driven by two core factors: **Temu’s losses continue to narrow, and profitability of the domestic e-commerce business is gradually improving.** Morgan Stanley projects that 2026 Non-GAAP operating profit will **rise 15% YoY to RMB 124 billion**, with operating margin increasing from **23.6% in 2025 to 25.8%**, and net margin **improving from 25.1% to 25.9%**. Goldman Sachs’ analysis is more granular, noting income tax declined only slightly by 5%—a proxy indicator for domestic profit—which implies Temu’s unit economics and GMV profitability are improving. As the negative impact of the trade-in program on small merchants waned, domestic platform profit margin in Q3 was better than expected, estimated at about 2.2%. ## Clear Path to Temu Profitability: Narrowing Losses Support Long-Term Value Despite pressure from slowing growth, analysts generally believe that Temu’s profitability turning point has initially taken shape, which is the key factor supporting Pinduoduo’s long-term value. For Temu, management stated that trust, safety, and product compliance are core elements of its high-quality development strategy, and it has invested heavily in these areas. Citi believes, **management’s statements reflect concerns about a challenging regulatory environment, but also demonstrate a willingness to adapt, aiming to further strengthen trust and growth opportunities in overseas markets. Despite uncertainties, Temu’s profitability turning point has been initially established.** Goldman Sachs forecasts Temu’s earnings before interest and tax (EBIT) at RMB 17 billion and RMB 24 billion for fiscal 2026 and 2027, respectively—lowered from prior forecasts—mainly due to incremental investments in product compliance and platform infrastructure. It is noteworthy that Goldman Sachs gives the domestic core business a 12x price-to-earnings (PE) ratio for 2026, 12x PE for Duoduo Grocery, and 25x PE for Temu (excluding US full custody), reflecting higher growth expectations for its overseas business. Morgan Stanley estimates total revenue will grow 11% YoY in Q4 2025, with online marketing services growing at 9%, and transaction service revenue increasing by 14%, benefitting from further recovery of the US full custody model. ## Discount Reflects Uncertainty Yet Remains Attractive All three investment banks believe that although Pinduoduo’s valuation is discounted relative to the industry, the risk/reward remains attractive given its earnings growth outlook and Temu’s limited valuation contribution at current market capitalization. Morgan Stanley uses discounted cash flow (DCF) analysis, maintaining a 14% weighted average cost of capital (WACC) and 3% perpetual growth rate. **Its $148 price target implies a 13x 2026 Non-GAAP PE ratio, which analysts consider reasonable given 14% annual profit growth expectations.** Goldman Sachs notes, **Pinduoduo currently trades at an 11x expected PE for 2026, attractive compared to the 17x median for China Internet coverage stocks**, and the company's profit outlook is superior to the sector. Analysts are optimistic about its advertising technology, ROI-based marketing tools, and Chinese supplier and supply chain cost advantages. Citi believes that, **despite a seemingly conservative valuation, the expected total return of over 35% remains attractive**. While slowing growth and profit fluctuations pose challenges, Pinduoduo’s long-term competitive advantages in supply chain efficiency and user stickiness remain solid, and current valuation has fully factored in market concerns. ## Warning of Slowing Growth: Marketing Revenue Growth Falls to Single Digits The data that most worried the market in the report is the online marketing service revenue growth, which fell to 8% for the first time, significantly below market expectations of low double-digit growth. This weakness suggests that GMV growth and monetization rate may be weaker than expected. Goldman Sachs estimates domestic GMV grew by 9% in Q3, only 1 percentage point higher than the industry average, a clear narrowing of Pinduoduo’s previous lead. Goldman Sachs believes this slowdown is mainly due to the rapid growth of Douyin e-commerce—estimating Douyin’s GMV growth at 30% this year, far outpacing traditional e-commerce platforms. At the same time, Alibaba and JD.com’s strategic investments in new business models like instant delivery and food delivery also attracted extra traffic. **Morgan Stanley correspondingly cut its GMV forecasts:** for 2025 from RMB 4.95 trillion to RMB 4.86 trillion (down 2%); for 2026 from RMB 5.50 trillion to RMB 5.34 trillion (down 3%); and for 2027 from RMB 5.99 trillion to RMB 5.72 trillion (down 5%). Despite lowered GMV forecasts, it raised its profitability estimates. Marketing expenses as a share of GMV are expected to remain at 2.5% in 2025, but fall to 2.3% in 2026 and 2027, indicating improved marketing efficiency. Analysis points out that this shift means Pinduoduo is moving from scaling growth driven by heavy subsidies to a more sustainable growth model focused on profit quality. #### Risk warning and disclaimer The market has risks, and investment needs caution. 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