Why PDD Holdings Stock Plunged Today

Shares of PDD Holdings (PDD -30.46%) were tumbling today after the Chinese e-commerce company and owner of Pinduoduo and Temu posted disappointing revenue growth in the second quarter and offered a downbeat commentary on the quarters ahead. Shares were down 28% as of 11:12 a.m. ET on the news. Image source: Getty Images. PDD runs into a wall PDD had been bucking the trend in Chinese e-commerce, continuing to put up phenomenal growth while peers like Alibaba and JD.com have struggled. However, that now seems to be changing. Second-quarter numbers were still impressive as revenue jumped 86% in the period to $13.4 billion, but that was short of the analyst consensus at $14.04 billion. Margins also continued to expand as adjusted operating profit jumped 139% to $4.48 billion. PDD improved its gross margin and gained leverage on expenses like sales and marketing and research and development. On the bottom line, the company posted adjusted earnings per share of $3.20, up from $1.45 in the quarter a year ago, and better than the consensus at $2.73. However, investors seemed more concerned about the weaker-than-expected top-line growth and cautious comments from management as co-CEO Lei Cehn said, "While encouraged by the solid progress we made in the past few quarters, we see many challenges ahead," implying more intense competition. He added, "We are prepared to accept short-term sacrifices and potential decline in profitability." What's next for PDD PDD didn't give specific guidance for the current quarter or the rest of the year as Chinese companies don't typically give guidance, but comments on the earnings call indicate it expects to see more intense competitive pressure, weighing on revenue growth. The good news is that PDD stock looks cheap at a price-to-earnings ratio of less than 10 now, a shockingly low valuation for a company still growing very rapidly, which reflects investors' cautiousness around China. Today's sell-off could prove to be a buying opportunity, but investors may want to take a cautious approach with the stock, given the broader challenges in China and management's indication that profits could soon fall.