TMTPost -- Goldman Sachs analysts still feel optimistic about shares of PDD Holdings Inc. despite Temu owner’s disappointed sales in the second quarter and warning of growth sustainability.  

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In their recent note, Goldman Sachs Equity Research analysts led by Ronald Keung rated Buy on PDD shares with Sum Of The Parts (SOTP)-based target price of of US$184, seeing shares have a potential of nearly 46% rise since the close Monday. Labeling PDD as a pioneer of Return on investment (ROI)-based marketing tools, analysts said they are bullish due to PDD’s advertising tech capabilities, China’s cost-competitive suppliers/merchants/supply chains alongside favorable risk-reward and the current market capitalization that implying no valuation ascribed to Temu.

Goldman analysts believed PDD’s year-to-date underperformance and now sub-10-time current year price-to-earnings (P/E) multiple have been reflecting investor concerns around profit sustainability on a rise in domestic competition and geopolitical concerns on Temu. Meanwhile, considering PDD’s much faster GMV growth and transaction services revenue beat that implies continued Temu growth traction, the analysts anticipated PDD can still be classified as one of the Chinese internet companies with fastest top line growth in the second quarter results season thus far, with strategies/investments to drive further growth ahead.

Prior to the analysts’ note, the American depositary receipts (ADRs) of PDD crashed 28.5%, their largest ever daily percentage decline ever Monday following earnings for the second quarter of the year. Shares further dropped 6.5% Tuesday, bringing the two-day decline to more than 14%. While PDD’s net income rose 144% year-over-year (YoY) to RMB32.01 billion for the June quarter, topping analysts estimated RMB27.5 billion, total revenue climbed 86% YoY to RMB97.06 billion (US$13.34 billion), still missing Wall Street projection of RMB99.99 billion. The revenue, decreasing 11.8% quarter-over-quarter (QoQ),  slowed from a 131% YoY increase in the preceding quarter.

Moreover, PDD management issued severe warning about the dwindling growth amid intense competition. Co-Chief Executive Officer Chen Lei admitted the company sees many challenges ahead. “We are prepared to accept short-term sacrifices and potential decline in profitability,” said in a financial report Monday. During a post-earnings briefing, Chen mentioned at least eight times that revenue and profits must “inevitably” decline as economic growth slows. “In the past quarter, our revenue growth rate slowed quarter-on-quarter. Looking ahead, revenue growth will inevitably face pressure due to intensified competition and external challenges,” said Liu  Jun, VP of Finance of PDD. “Profitability will also likely to be impacted as we continue to invest resolutely.” 

Goldman Sachs analysts believed that the initial negative share price reaction is likely due to three factors. The first is the elevated expectations ahead of the print, with the stock up about 20% from the low since late July in anticipation of a solid result. The second is the first indication of online marketing services growth normalization, down to 20% YoY versus Goldman and Wall Street consensus’ projection of 36% and 33%, respectively. The third is the management’s comments on slower revenue growth and fluctuation in profits ahead owing to intensified competition or external challenges and potential decline in domestic profitability in the long-term to drive high-quality development. Moreover, the management didn’t disclose any plan on shareholder return policies in the foreseeable term given the company is still in an investment phase.