Deutsche Bank cuts PDD Holdings rating following 45% earnings decline

Investing.com -- Temu owner PDD Holdings (NASDAQ:PDD) received a rating cut to Hold from Buy at Deutsche Bank (ETR:DBKGn) after the Chinese e-commerce firm reported a steep 45% year-on-year drop in non-GAAP net income for the first quarter, significantly missing expectations.

The results marked PDD’s first earnings decline in 16 quarters and triggered an 18% drop in the stock at the open on Tuesday, before closing down 13.6%.

The bank also slashed its price target on the stock from $166 to $112, citing a combination of competitive pressure, reduced profitability, and a strategic pivot toward supporting merchants.

“The market has underestimated the magnitude of the so-called ‘decline in profitability’,” Deutsche Bank analysts wrote, adding that its own projections are now well below consensus.

PDD’s 1Q25 revenue rose 10% year-on-year to RMB95.7 billion but missed the Bloomberg consensus by 6%. The 45% earnings drop brought net profit down to RMB16.9 billion, falling 39% short of analyst forecasts.

Operating margin fell by 13.1 percentage points to 16.8%, while sales and marketing expenses surged 43%.

Deutsche’s report pointed to “unfavorable” positioning in China’s evolving e-commerce landscape.

Rivals like JD.com and Tmall have been the primary beneficiaries of Beijing’s consumption stimulus, while tighter regulatory scrutiny has also reversed what Deutsche Bank described as a “low-price, low-quality” competitive dynamic—pressuring PDD’s core model.

The analysts also flagged structural challenges, including an unsustainable 35% net margin and signs that profitability is now being redistributed toward merchants.

The report noted PDD’s own merchant support initiatives, including a RMB100 billion program and fee reductions, as signs that “over-earning” is being unwound.

“We now project the non-GAAP operating margin to gradually reduce to around 20% in three years (from the peak of 30% in 2024),” analysts Jessie Xu and Leo Chiang wrote. They also cut their long-term EBIT margin estimate to 15% from 23%.

Moreover, earnings estimates for 2025–27 were cut by 26–29% and 6–9% for revenue. “2025 will likely see a double-digit earnings decline,” Deutsche Bank said, projecting RMB100 billion in non-GAAP net profit for the year, down 18%.

Despite PDD’s strong cash position, the bank sees limited upside near term due to muted earnings per share (EPS) growth and a lack of catalysts.