Pinduoduo 2025 Q1 Data Interpretation -- Only Long-Term Investors Remain

Among all Chinese concept companies, Pinduoduo is probably the least sensitive to "expectations," whether during periods of performance growth or decline.

The latest Q1 2025 earnings report from Pinduoduo showed that revenue growth, commission income growth, and gross profit all fell below expectations, while operating profit growth was significantly below expectations, marking the first negative growth in recent times, with a sharp year-on-year decline of 38.07%.

1. The unexpected aspect is the speed of the decline, not the decline itself

The performance decline was actually expected, as Pinduoduo's management had already "unexpectedly" taken a harsh stance during the Q2 2024 earnings call: "To support the sustainable development of the platform ecosystem, we will increase support for high-quality merchants over the next 12 months. In the short term, profits may fluctuate, but the overall trend of declining profits is inevitable."

Looking at the performance of subsequent quarters, it indeed aligned with management's statements, showing a clear and continuous downward trend from Q2 2024 to Q1 2025:

Revenue growth dropped from 85.65% to 10.21%;

Operating profit growth fell from 156.04% to -38.07%;

Advertising revenue growth declined from 29.48% to 14.76%;

Transaction commission income growth plummeted from 234.15% to 5.85%;

It seems we can draw the following conclusion:

When management says performance is good, we can usually conservatively discount it by 20-30%;

But when management proactively says performance will decline, regardless of the actual reasons or considerations, the reliability is likely still above 90%.

Of course, what was unexpected this quarter was the significant drop in profits, marking the first negative growth in recent times with a huge decline.

2. What happened this quarter?

1) The most glaring data this quarter is the sharp decline in profits, driven by several factors:

i) Marketing expenses reached 33.403 billion yuan, a significant year-on-year increase of 42.68%, nearly 10 billion yuan higher than the same period last year; it was also higher than the Q4 peak season's 31.357 billion yuan.

The increase in marketing expenses is partly due to management's earlier statement about supporting the platform ecosystem's sustainable development by increasing support for high-quality merchants;

And another part is the additional subsidies Pinduoduo had to provide compared to JD.com and Alibaba under the national subsidy program: Due to Pinduoduo's disadvantages in self-operated businesses and the number of brand merchants, it received a lower proportion of national subsidies, forcing it to bear additional costs to subsidize merchants and users, including upgrading from the "100 Billion Subsidy" to the "Trillion Support Plan." The national subsidy program may continue until the end of 2025 or later, but its intensity will inevitably weaken and end, reducing its impact on Pinduoduo.

ii) Interest and investment income dropped sharply from an average of around 5 billion yuan per quarter last year to 223 million yuan, a reduction of nearly 5 billion yuan:

What specific items are included here? Given Pinduoduo's extremely minimal financial reporting, almost no one knows, and Pinduoduo never provides detailed explanations;

At the same time, is the magnitude of this decline reasonable? Normally, it certainly isn't, so we can only treat it as a temporary disturbance that will likely recover to some extent, pending further observation.

2) Advertising revenue growth was 14.76%, one of the few items this quarter that slightly exceeded expectations. The increased marketing spending, through subsidies, at least stabilized the growth of the main platform.

3) Cash (excluding restricted cash) + short-term investments continued to grow:

In Q2 2024, management unexpectedly announced: "Share buybacks or dividends at the current level are inappropriate, and there is no need for such actions in the foreseeable future."

In the following quarters, "cash + short-term investments" grew from 228.171 billion yuan at the beginning of the period to 294.375 billion yuan by the end of this quarter, with cash steadily increasing each quarter.

The massive cash reserves currently generate only interest and investment income, which saw a sharp decline this quarter for unknown reasons;

Beyond that, management may be delaying shareholder returns due to expectations of further profit declines and the need to increase subsidies for merchants and users.

Why hold huge cash reserves but not return value to shareholders? From the financial data alone, this remains one of Pinduoduo's mysteries, waiting to be revealed in the future.

3. Has the decline bottomed out?

Let’s compare the latest quarterly performance of the three e-commerce giants: Pinduoduo, Alibaba, and JD.com.

Back in Q2 2024, Pinduoduo's performance growth and gross margins were far ahead of Alibaba and JD.com, not even resembling an e-commerce company but rather outperforming firms like Tencent and NetEase.

By Q1 2025, Pinduoduo's revenue growth had dropped to 10.21%, barely above single digits; meanwhile, JD.com's growth reached 15.78%, and Alibaba's comparable customer management revenue growth was 11.80%, both surpassing Pinduoduo.

In terms of operating profit growth, Pinduoduo saw a sharp decline of 38.07%, while Alibaba and JD.com posted significant increases of 92.79% and 36.79%, respectively, showing completely opposite trends.

Compared to Alibaba and JD.com, Pinduoduo's performance growth this quarter has accelerated its fall to a low level.

Will it go even lower?

During this quarter's earnings call, a question was raised: "Will this trend (profit decline) continue in Q2?"

Management did not directly answer, but the closest possible response was: "Our profitability may face challenges in the near and longer term," indicating continued pressure in the future;

At the same time, management emphasized: "Our investment decisions do not overly focus on single-quarter financial performance but rather on long-term intrinsic value. Volatility will not change our focus on long-term value."

This long-term value is achieved through the 100 Billion Subsidy and Trillion Support Plan to support high-quality merchants, thereby positively impacting the ecosystem and enabling high-quality growth in the future.

For Pinduoduo, this is a long-term, correct, and difficult but necessary task, even if it inevitably puts pressure on profits; as long-term investors, we can afford to wait.

1. Operating Performance

1.1 Operating Performance - Single Quarter