New Street downgrades PDD stock on limited growth upside, margins visibility

Investing.com -- New Street Research downgraded PDD Holdings (NASDAQ:PDD) stock to Neutral from Buy, pointing to limited revenue growth prospects and uncertain margin visibility despite a stronger-than-expected second-quarter performance.

PDD shares edged lower in premarket trading on Tuesday.

The Temu parent company reported second-quarter revenue of RMB104.0 billion, up 7.1% year-on-year and broadly in line with consensus but below New Street’s forecast.

Non-GAAP gross margin came in at 56.0%, a sharp drop from 65.3% a year earlier, while operating margin was 26.7%, beating expectations but also down from last year’s 36.0%.

Earnings per share of RMB22.07 topped both consensus and the broker’s estimate.

While margins fared better than expected, PDD cautioned that profitability could continue to fluctuate in the coming quarters.

“The company is also willing to accept lower profits to consistently reinvest in the platform ecosystem,” analyst Jin K. Yoon wrote, noting the company’s RMB100 billion support program and consumer giveback initiatives such as a long-term RMB10 billion coupon campaign.

These measures fueled record sales during the midyear shopping festival across categories including fresh produce, electronics, and apparel.

Despite trading at 11.2 times estimated 2026 earnings, Yoon highlighted that “visibility on margins also remains limited amid continued investments in the platform ecosystem.”

Competition in China’s domestic market and regulatory uncertainties abroad further weigh on the outlook.

PDD reiterated its long-term focus on Duoduo Grocery, which now covers 70% of Chinese villages, and on strengthening supply chain, service, and compliance capabilities in its global business.

New Street trimmed its 2025 revenue forecast to RMB426.9 billion, cut gross margin estimates, but raised operating margin projections due to lower sales and marketing expenses.

The firm maintained its $120 price target, implying a 6.4% downside from the latest close of $128.21.