Wall Street views PDD Q3 financial report: Operating profit returns to growth due to low base, Temu's profitability turning point established

PDD's latest financial report shows that Q3 operating profit achieved a year-on-year growth of 1% after several quarters of decline, reaching RMB 27.1 billion (non-GAAP), and net profit increased by 14% year-on-year to RMB 31.4 billion. This marks a turning point in profitability. However, the growth rate of online marketing service revenue has dropped to a single-digit level of 8% for the first time, significantly below the market's expectation of low double-digit growth, indicating that the growth of gross merchandise volume and monetization rate is weaker than expected. After the release of the financial report, the stock price fell by 6%, reflecting investors' concerns about the slowdown in growth.

Regarding PDD's financial report, the three major Wall Street investment banks—Goldman Sachs, Morgan Stanley, and Citigroup—maintained a "buy" rating, but their valuation targets showed divergence. Morgan Stanley maintained a target price of $148, Citigroup raised its target price to $170, while Goldman Sachs lowered it to $147. Analysts generally believe that the continuous narrowing of Temu's business losses and the establishment of a profitability turning point in 2026-2027 are the core logic supporting the valuation.

Management reiterated during the earnings call that they will continue to invest in the platform ecosystem through a RMB 10 billion merchant support plan and a RMB 10 billion support project. In the short term, revenue and profit growth will continue to be under pressure, and profits will experience quarterly fluctuations. However, analysts pointed out that the signs of continuous narrowing of Temu's business losses are clear, laying the foundation for future profit growth.

It is worth noting that although profit performance exceeded market expectations, the growth rate of online marketing service revenue dropped to a single-digit 8% for the first time, significantly below the market's expectation of low double-digit growth, suggesting that the growth of gross merchandise volume and monetization rate may be weaker than expected. After the release of the financial report, PDD's stock price fell by 6%, as investors expressed concerns about its slowing growth.

Establishing Profitability Turning Point: Operating Profit Returns to Positive Growth

The most noteworthy aspect of Q3 is that operating profit ended several quarters of year-on-year decline, achieving a positive growth of 1%. This improvement is mainly attributed to a lower comparison base and stable sales and marketing expenses. Under non-GAAP, net profit increased by 14% year-on-year to RMB 31.4 billion, exceeding market expectations.

Morgan Stanley particularly emphasized that this improvement trend will continue into Q4 2025 and throughout 2026, with core drivers coming from two aspects: the continuous narrowing of Temu's business losses and the gradual improvement of profit margins in domestic e-commerce.

The firm expects that in 2026, non-GAAP operating profit will climb 15% year-on-year to RMB 124 billion, with operating profit margin increasing from 23.6% in 2025 to 25.8%, and net profit margin improving from 25.1% to 25.9%.

Goldman Sachs' analysis points out in more detail that income tax has only slightly decreased by 5%—as a proxy indicator for domestic profits, this suggests that Temu's unit economic efficiency and gross merchandise volume profit margin are improving. Due to the diminishing adverse impact of the trade-in program on small merchants, the domestic platform profit margin in Q3 was better than expected, estimated at about 2.2%

Temu's Profit Path Clarified: Narrowing Losses Support Long-term Value

Despite facing pressure from slowing growth, analysts generally believe that the profit inflection point for Temu's business has been initially established, which is a key factor supporting PDD's long-term value.

Regarding Temu's business, management stated that trust, safety, and product compliance have been core components of their high-quality development strategy, with significant investments made in this area.

Citigroup believes that management's statement reflects concerns about the challenging regulatory environment while also indicating a willingness to adapt to changes, aiming to further strengthen trust and growth opportunities in overseas markets. Despite uncertainties, the profit inflection point for Temu's business has been initially established.

Goldman Sachs expects Temu's EBITDA for the fiscal years 2026 and 2027 to be RMB 17 billion and RMB 24 billion, respectively, a downward adjustment from previous expectations, primarily due to incremental investments in product compliance and platform infrastructure.

Notably, Goldman Sachs assigns a 12x price-to-earnings ratio to the domestic core business for 2026, a 12x price-to-earnings ratio to DuoDuo MaiCai, while Temu (excluding full custody in the U.S.) is given a 25x price-to-earnings ratio, indicating higher growth expectations for its overseas business.

Morgan Stanley expects total revenue in Q4 2025 to grow by 11% year-on-year, with online marketing services growing by 9% and transaction service revenue increasing by 14%, benefiting from the further recovery of the U.S. full custody model.

Discount Reflects Uncertainty but Remains Attractive

All three major investment banks believe that although PDD's valuation is at a relative discount to the industry, considering its profit growth prospects and the current market value's limited valuation of Temu, the risk-reward remains attractive.

Morgan Stanley uses a discounted cash flow model for valuation, maintaining a weighted average cost of capital of 14% and a perpetual growth rate assumption of 3%. The firm's target price of $148 implies a 13x price-to-earnings ratio based on 2026 non-GAAP earnings, which analysts believe aligns reasonably with the 14% annual profit growth expectation.

Goldman Sachs points out that PDD currently trades at an 11x price-to-earnings ratio based on 2026 expectations, which remains attractive compared to the median of 17x for Chinese internet coverage stocks, and the company's profit growth prospects are better than the industry. Analysts are optimistic about the company's advertising technology capabilities, ROI-based marketing tools, and the competitive advantages of strong suppliers and supply chains in China.

Citigroup believes that despite the valuation appearing conservative, an expected total return rate of over 35% remains attractive. Although slowing growth and profit volatility pose challenges, PDD's long-term competitive advantages in supply chain efficiency and user stickiness remain solid, and the current valuation fully reflects market concerns.

Warning of Slowing Growth: Marketing Revenue Growth Falls to Single Digits

The most concerning data in the financial report is that online marketing service revenue growth has fallen to 8% for the first time, significantly below market expectations of low double-digit growth. This weak performance in this metric suggests that total merchandise transaction volume growth and monetization rates may be weaker than expected.

Goldman Sachs estimates that domestic merchandise transaction volume grew by 9% in Q3, only 1 percentage point higher than the industry growth rate, indicating a significant narrowing of the previous lead The bank believes that this slowdown is mainly impacted by the rapid growth of Douyin e-commerce—Goldman Sachs estimates that the total merchandise transaction volume of Douyin e-commerce will grow by 30% this year, far exceeding traditional e-commerce platforms. At the same time, Alibaba and JD's strategic investments in new business models such as instant delivery and takeout have also attracted additional traffic.

Morgan Stanley has accordingly lowered its total merchandise transaction volume forecast: from RMB 49.5 trillion in 2025 to RMB 48.6 trillion (a decrease of 2%), from RMB 55.0 trillion in 2026 to RMB 53.4 trillion (a decrease of 3%), and from RMB 59.9 trillion in 2027 to RMB 57.2 trillion (a decrease of 5%).

Despite the downward revision of the total merchandise transaction volume forecast, the bank has raised its expectations for profitability. The marketing expenses as a percentage of total merchandise transaction volume are expected to remain at 2.5% in 2025, but will decrease to 2.3% in 2026 and 2027, indicating an improvement in marketing efficiency.

Analysis points out that this change means that PDD is shifting from relying on high subsidies to drive scale growth to a more sustainable growth model that emphasizes profitability quality