Bernstein downgrades PDD, says it needs to ’start doing grown-up company things’

Investing.com -- Bernstein on Wednesday cut its rating on Temu parent PDD Holdings to Market-Perform from Outperform, arguing the company’s domestic business is maturing, demanding clearer communication with investors and more disciplined capital allocation.

Analyst Robin Zhu said PDD now needs to “start doing grown-up company things… like meet with investors, and return cash,” warning that recent stagnation in domestic engagement metrics sits awkwardly with a model built on funnel scale and high user activity.

Daily active users (DAUs) and app sessions dipped slightly, while aggregate time spent rose just 3.7%, leaving analysts concerned that top-of-funnel momentum is fading.

The downgrade follows a largely in-line third-quarter update. Revenue of RMB108 billion rose 9% year on year and matched consensus, while non-GAAP operating profit of RMB27.1 billion was more than 10% ahead of street forecasts.

Online Marketing Services (OMS) revenue grew 8.1%, which Zhu said undershot its assumed domestic GMV growth rate and implied further pressure on ad monetisation.

Transaction Services revenue performed better, up 9.9% year on year, supported by lower incentives at Duoduo Grocery and improved mark-ups within Temu as tariff volatility eased.

Zhu pointed to softer OMS revenue as evidence that advertisers may have been directing incremental budget toward rival platforms.

The analyst added that PDD appears structurally disadvantaged in an environment where competitors invest heavily in on-demand capabilities and build super-app ecosystems anchored in high-frequency services.

“Building an on-demand fulfilment network from scratch would almost certainly be time-consuming and very costly,” Zhu wrote, and it remains unclear whether PDD can, or even wants, to narrow that gap.

He also highlighted a notable drop in marketing spend relative to their expectations, suggesting Temu may have seen losses narrow in the U.S. late in the quarter. R&D outlays rose sharply, up 53.6% year on year and exceeding 4% of revenue for the first time in two years.

Valuation was the main counterargument Bernstein acknowledged, noting PDD trades around 10x forward earnings on its estimates.

Temu’s improving economics and Meituan’s exit from its Select business may offer some earnings support in coming quarters. Still, Zhu warned that deploying PDD’s sizeable cash reserves to reignite domestic growth represents “a meaningful risk not just to its own shares, but also to our broader e-commerce coverage in China.”

Bernstein trimmed its price target to $135 from $140, reflecting higher near-term earnings forecasts but a lower valuation multiple.