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$PDD Holdings Inc(PDD)$ - 2Q25 Profit Beat on Lower Opex, But Growth Slows and Visibility Remains Low; Maintain HOLD but Increase PT to $120

We are maintaining our HOLD rating but increasing price target to $120 (was $100) after PDD reported total revenue of RMB104.0bn (+7% y/y vs. +10% in 1Q), broadly in line with expectations, driven by online marketing services (+13% y/y to RMB55.7bn) and modest growth in transaction services (+1% y/y to RMB48.3bn). Revenue growth slowed further this quarter amid intensifying domestic competition and a transition period in the overseas business.

Operating profit came in at RMB25.8bn (-21% y/y), while non-GAAP operating profit was RMB27.7bn (-21% y/y, vs. -36% in 1Q), 10%/11% above Tiger/Street. Gross profit for 2Q25 was RMB58.1bn, representing a gross margin of ~56%, down meaningfully from ~65% in the prior year. The decline was primarily driven by a 36% y/y surge in cost of revenues, outpacing the 7% revenue growth. Key drivers of the higher cost base included increased fulfillment fees, higher bandwidth and server costs, and greater payment processing expenses.

Sales & marketing expenses rose only 4% y/y to RMB27.2bn, a lighter increase than anticipated (26%/23% below Tiger/Street), supporting profitability. Non-GAAP operating margin was 27% (248bps/236bps above Tiger/Street), down from 36% in the prior year but still better than feared.

Management emphasized that 2Q profitability should not be extrapolated into future quarters. Profit levels benefited from seasonality and cost discipline but are not sustainable, as the company continues to invest heavily in its RMB100bn merchant support program, fee reductions, logistics subsidies, and global expansion.

They acknowledged slower revenue growth as a direct result of heightened competition from peers investing in new business models, as well as ongoing adjustments in global operations. Management reiterated that the company will continue to prioritize long-term ecosystem health over short-term earnings, suggesting profitability will fluctuate.

In sum, while 2Q25 profit was better than expected on lower opex, the underlying trend is weaker: Revenue growth slowed to single digits despite heavy investment. Margins are likely to remain volatile as management reinvests into subsidies, logistics, and overseas expansion. Visibility is limited given competitive pressures in China and uncertainties in overseas markets.

We therefore remain cautious and stay on the sidelines. Despite PDD’s better than expected 2Q, we see near-term earnings volatility and limited clarity on monetization of investments.

Estimate revisions. 3QE total revenue estimate largely unchanged, but decreasing 3QE non-GAAP EBIT by 19%. 2025E total revenue estimate largely unchanged, but increasing ‘25E non-GAAP EBIT by 1%.

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