Internet stocks have all disclosed their performance in the first half of the year, with each performing decently. However, in this interim report, what's interesting is the handover of new and old ghost stories between Pinduoduo and Meituan. One is Pinduoduo, which has been besieging Taobao and JD, choosing to &#34;self-destruct its stock price,&#34; while the other is Meituan, which was rumored to be overturned by Douyin before August.
I. The self-destructing ghost story of Pinduoduo
Due to Pinduoduo's continuous performance exceeding expectations in the past, the market has always had high expectations for its performance but with a low valuation, especially maintaining high growth in the first quarter. With the recent trend of stock price volatility, the market's bet on this performance has become even heavier.
In terms of holdings, according to the 13F filings, in the second quarter, a total of 147 institutions with assets exceeding USD 1 billion increased their positions in Pinduoduo by 5% compared to the previous quarter, with 20% more institutions choosing to increase their holdings, reaching 269 institutions. In other words, over 400 institutions bought Pinduoduo in the second quarter.
Some Chinese institutions that were already heavily invested in Pinduoduo increased their stakes even further, with Hillhouse Capital increasing by about 1.57 million shares, an increase of over USD 200 million, Tairen Capital buying nearly USD 250 million, and Gaoyi Asset Management increasing by about USD 60 million. Sequoia Capital China added nearly 14.9 million shares in the second quarter, worth USD 2 billion.
Why did so many institutions choose to buy Pinduoduo in the second quarter?
Firstly, the market expects the domestic main site to continue eroding the market share of Taobao and JD, especially when seeing that the revenue of Taobao and JD has stagnated. Naturally, this leads to the speculation that Pinduoduo's performance may not be bad because Pinduoduo mainly competes with these two companies.
Although there has always been political risk for Pinduoduo, the market usually sees this as an option for a pleasant surprise. In addition, with many Chinese concept stocks starting the trend of shareholder returns this year, everyone speculates that even if Pinduoduo does not have shareholder returns this year, there should be corresponding shareholder returns in the next one or two years after the competitive landscape stabilizes, right?
However, at this earnings conference, Pinduoduo's management's self-destructive remarks suppressed the stock price, completely triggering market concerns and turning Pinduoduo from a good story into a ghost story.
The management first vaguely mentioned that profits would decline, without clearly stating whether it was a decrease in profit growth rate or a direct decline in profit, leaving the market confused. However, the more common view is that profits will decline in the third quarter.
Another point is that as of the end of the second quarter, Pinduoduo held USD 284.9 billion in cash and cash equivalents, which is almost the largest cash reserve among US-listed companies without a shareholder return plan. However, the management stated that there will be no shareholder returns in the coming years, which is contrary to market expectations. It can be said that the management of Pinduoduo has shattered all the high expectations of the market
The potential reasons for the management of Pinduoduo to say this are twofold.
First, the intensifying competition in China, with Pinduoduo, Taobao, and JD.com all increasing subsidies to merchants, investors are concerned whether the alpha of Pinduoduo's domestic main site has reached its peak. Another point is, without dividends and repurchases, whether the capital expenditure of the domestic main site and overseas Temu will increase, how large the scale of capital expenditure will be, and how long the expenditure will be maintained?
The first concern stems from the revenue in the second quarter. In the second quarter, Pinduoduo's advertising revenue was 49.1 billion yuan, a year-on-year increase of 29%, compared to a 56% increase in the previous quarter. Market expectations for the second quarter growth were around 33%, with some bullish expectations even higher. The transactional revenue in the second quarter was 47.9 billion, with market expectations around 50 billion. In other words, both the performance of Pinduoduo's main site and Temu in terms of revenue fell below expectations.
Is this financial report really that bad? Not necessarily, but under the very pessimistic guidance of the management, the market has amplified concerns about the peak and decline of growth for the main site and Temu.
On one hand, the online retail market growth rate in the second quarter was halved, with a year-on-year growth of about 11-12% in the first quarter, dropping to 5-6% in the second quarter, as macroeconomic weakness intensified and affected the overall e-commerce market. Although Pinduoduo still outperforms Taobao and JD.com, it is rumored that the growth rate of Douyin has also significantly slowed down in the past two months, and the overall market performance is not optimistic.
Under increased macro pressures, Pinduoduo in the second quarter is no longer like the previous few quarters, even if the macro is poor, it still shows good performance. Now Pinduoduo's alpha has encountered a turning point affected by macro factors.
On the other hand, according to Dolphin Research, the comprehensive monetization rate of Pinduoduo's main site business through advertising + commissions is above 4.5%, but the rate of increase in monetization is significantly narrower compared to the previous quarter. When revenue growth and monetization rate improvement are both slowing down, the market doubts Pinduoduo's main site's high growth capability.
Another reason for the decline in profits is the concern about increased capital expenditure. Although Pinduoduo's cost control in the second quarter is still very good, squeezing out the maximum efficiency from human resources, under the circumstances of increased macro pressures and intensified competition, it also has to face the issue of increased capital expenditure.
Recently, domestic competitors such as Taobao, JD.com, and Douyin have increased subsidies to merchants, and Pinduoduo is also increasing its efforts. As for overseas Temu, it is not only competing with Amazon, but according to the sharing of Snowball DeeeepValue users, the competition between Temu and Shein is also gradually intensifying. In August, both Temu and Shein increased their advertising spending and mutual lawsuits.
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Perhaps based on these two potential concerns, Pinduoduo shorted itself, directly puncturing the special pricing of high expectations but low valuation, and also starting its own ghost story.
As for how to value Pinduoduo next, funds may prefer to wait and see the performance in the third quarter. It is necessary to see if the actual performance is really as pessimistic as the management says, as well as the mystery of rising fees, before answering investors' concerns. However, looking at this quarter, it can be confirmed that the macroeconomic weakening has begun to affect Pinduoduo's alpha.
II. Ghost stories every year, but Meituan is indestructible
After Pinduoduo's ghost story began, Meituan, which handed in its second-quarter report, can be said to have successfully defended its position, fending off Douyin and alleviating concerns about being overturned by Douyin.
Meituan can be said to be the company with the most ghost stories in the Internet stocks, such as the social security issue in 2021 causing a sharp drop in stock price, Douyin's local life efforts in 2022, Douyin's entry into food delivery in 2023, rumors of acquiring Ele.me, Meituan has had bigger ghost stories every year in the past three years.
This year, the main issues are twofold: increased competition in local life, with rumors in July of Douyin increasing subsidies, worrying about Meituan's in-store profit margins; and since the rumor last year of Douyin entering the food delivery market, this year there are rumors of Douyin acquiring Ele.me again. The usual argument is that Douyin provides more subsidies to merchants and wants to compete with Meituan by burning money.
As we discussed in previous articles, firstly, do not forget how Ele.me lost to Meituan. The food delivery business cannot reverse Meituan's existing economies of scale and delivery rates just by adding Douyin's traffic interface. In the current macro environment, burning money to grab market share is also unlikely. Therefore, Douyin's food delivery has not been mentioned by many recently, and the scale of Douyin's food delivery is still difficult to rise, which indirectly proves that the delivery end is Meituan's biggest moat, not easily shaken.
This year, with Meituan, Alibaba, and JD.com all focusing on instant delivery, the food delivery ghost story has turned into a competition between Douyin and Meituan for local instant retail business.
However, it is worth noting that as Douyin does not have delivery capabilities, it chooses third-party delivery. In the instant delivery business, it plays more of a role in transaction commission, while the ones getting the biggest share are Meituan, Ele.me, Dada, etc., who have delivery capabilities. From this perspective, Meituan has a higher ceiling in the instant delivery business and can receive more orders.
Afterwards, the main players in instant delivery are mainly Meituan and Ele.me. According to the current food delivery market share, Meituan holds 70% and Ele.me holds 30%, so it is not difficult for Meituan to take 60-70%. Especially with Alibaba being pressured by Pinduoduo and prioritizing profitability, it is unlikely to compete head-on with Meituan in instant delivery. Therefore, Meituan still has many potential points to improve profitability, such as the relatively low penetration rate of instant delivery and the loss reduction in new businesses like Xiaoxiang and grocery shopping
In the second quarter, Meituan's year-on-year growth rate in instant delivery revenue was 13%, slightly lower than the growth rate in order volume. However, the difference in growth rates between the two has narrowed significantly to only 1.2 percentage points. Especially, the average revenue per delivery is stabilizing, and the profit margin of this business is improving.
It can be said that Meituan has successfully defended against the attack from Douyin in food delivery and instant delivery. However, in the competition for local life services, Meituan is indeed facing significant threats, which led to Meituan's market value dropping to over 300 billion at the beginning of the year, as local life services are where Meituan makes the most money. Where is the &#34;profit bottom line&#34; for Douyin and Meituan in their business? This is something the market has not fully understood before, and concerns about local life services have always been there.
Looking at the second-quarter report, commission and advertising revenue increased by 19.7% and 20.1% respectively year-on-year. Order volume in the second quarter grew by over 60% year-on-year. Considering the decline in unit price, the actual growth rate may be between 35-40%, or even higher, which is far above the market's expectation of around 25%.
The operating profit margin of the in-store business has returned to 35%, and the number of active merchants for the year has also reached a historical high. This proves that Meituan's in-store business has not been impacted, but it cannot be said that Meituan is counterattacking Douyin. It is more about both Meituan and Douyin choosing to prioritize making money rather than aggressively lowering prices to grab market share. In other words, when competitors realize they cannot burn money to grab market share, everyone will prioritize making profits.
Of course, it is not enough to judge the competition between Meituan and Douyin based solely on one quarterly report, but at least for now, we can see that the business profit margin is improving, reducing the possibility of a downturn.
Conclusion
The competitive landscape for Meituan will be better than before. Firstly, the core in-store business has successfully defended its position, and the profit margin is rising. Secondly, there is incremental growth in the instant delivery industry, with current penetration rates still not high. Alibaba's Ele.me is prioritizing profitability, while its main business is also being challenged by Pinduoduo. Everyone tends to prioritize making money rather than aggressively lowering prices to expand. Thirdly, whether new businesses can reduce losses.
Meituan announced a new $1 billion share buyback in the second quarter, having repurchased over $2 billion before the second quarter, accounting for approximately 4% of the total share capital for the year. With such growth potential and shareholder returns, Meituan is basically the most outstanding company in the second quarter among internet stocks. However, considering Meituan's potential overseas expansion and increased investment in new businesses, the possibility of further increasing shareholder returns is somewhat lower. At this stage, it is more about growth prospects.
On the other hand, Pinduoduo, which also has high growth, chose to discourage investors by not providing shareholder returns, resulting in a significant difference in expectations. However, it should not be overlooked that the management of Pinduoduo rarely speaks positively, and its growth potential is strong. It remains to be seen how long this ghost story will take to resolve

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The performance comparison between PDD and Meituan has attracted market attention. Although PDD's performance exceeded expectations earlier, its stock price is currently fluctuating. Institutions have significantly increased their holdings, and the market has high expectations for its future performance. Under strong growth, PDD has strengthened its market share competition with Taobao and JD.com. However, negative remarks from management at the performance conference have shaken market confidence, potentially turning it into a "ghost story"

- In the first half of the year, internet stocks performed moderately, with Pinduoduo and Meituan taking the spotlight. Pinduoduo's self-exposure on performance led to market concerns despite institutional backing. Meituan successfully defended against rumors of Douyin's threat. Pinduoduo's management dampened market optimism with profit warnings, contrasting Meituan's resilience. Concerns over competition and profit margins persist for both companies amidst evolving market dynamics.
- Meituan's strategic resilience shines as it navigates competitive challenges, particularly in local services. The company's focus on profitability over aggressive market share tactics pays off, showcasing a robust business model. Despite ongoing competition, Meituan's profit margins show improvement, hinting at a stable outlook in the face of market uncertainties.
- Pinduoduo's contrasting approach of self-sabotage raises investor skepticism, especially with no shareholder returns in sight. While Meituan's prudent strategy yields positive results, Pinduoduo's growth potential remains clouded by uncertainties. Both companies face distinct challenges in a competitive landscape, shaping their future trajectories in the dynamic internet sector.

Meituan successfully defends against Douyin, while the ghost story of PDD is just beginning