Shares in Pinduoduo (PDD Holdings), the Chinese owner of discount retailer Temu, have plunged by nearly 29 per cent in New York in a move that has wiped $55bn (£41.6bn) off the company’s market value.
The steep decline followed a warning from management about an impending nosedive in profits, causing investors to reassess the company’s prospects.
It could be seen as a confirmation of some analyst fears that Temu’s aggressive marketing strategy may be unsustainable when coupled with its ultra-low prices that has helped the ecommerce site known for its “shop like a billionaire” motto, achieve meteoric success in recent years.
But, in an earnings call, co-chief executive Zhao Jiazhen said that while short-term profits may fluctuate, “in the long run, the decline in our profitability is inevitable”.
His counterpart, Chen Lei, also said it was “not an appropriate time” to pay dividends or initiate share buybacks, and that both of these are unlikely “in the foreseeable years ahead”.
Temu: ‘Stellar run has come to a crashing halt’
“The group’s stellar run has come to a crashing halt,” said AJ Bell investment director Russ Mould. “There is a perfect storm of uncertain economic conditions, cautious consumers and competitive pressures.
“It suggests that even bargain basement operators can struggle if consumers are thinking hard about where they spend money.
Mould added: “The sharp fall in PDD’s share price will prompt the market to reappraise the business. The latest results are a reminder that even the most successful companies cannot maintain very high levels of growth forever.”
Despite the gloomy outlook, PDD reported a quarterly net profit of 32bn renminbi (£3.4bn), a 144 per cent increase year-on-year, with a cash balance of 285bn renminbi (£30.2bn).
The company also announced a 10bn renminbi (£1.1bn) investment in the first year of a new initiative aimed at lowering fees for “high-quality merchants” and fostering a “healthy and sustainable platform ecosystem.”
PDD’s stock showed signs of recovery, rising 1.3 per cent in pre-market trading.
Temu’s fast fashion rival Shein is reportedly plotting a listing in London. However, concerns over the company’s track record on human rights may cast a shadow over its public offering.