The low-cost e-commerce company is sacrificing some profit to repair its seller economics, deepen its supply chain and prepare its global Temu arm for a more compliance-heavy phase

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Key Takeaways:

  • PDD's latest results suggest its old formula of cheap traffic and extreme pricing is giving way to a model built around supply-chain depth and better merchant relations
  • A big bet for investors is whether the low-cost e-commerce company's international Temu arm can adapt to more complex business conditions outside China

For years, e-commerce company PDD Holdings (NASDAQ:PDD), known for its rock-bottom prices, sold investors on scale and speed: more users, more merchants, more orders, more growth. But as it matures, the company has shifted that formula to something slower and less glamorous — better merchant relations, deeper supply chains, wider logistics coverage and a more compliant global business.

That may help to explain why the market looked past the company's latest quarterly report issued last week, which looked a bit messy. Rather than panic, investors sent the stock up as much as nearly 10% the day of the announcement. That suggests they saw the Temu owner less as a company in breakdown, and more as one trying to evolve from a bruising stretch of domestic competition and mounting regulatory pressure at home and abroad.

The numbers show why the debate around PDD has become more complicated. The company's fourth-quarter revenue rose 12% year-on-year to 123.9 billion yuan ($17.7 billion), but its net income fell 11% to 24.5 billion yuan. More tellingly, online marketing services — the company's traditional cash engine — grew just 5% to 60 billion yuan, far slower than the 19% rise in transaction services to 63.9 billion yuan.

Even after the brief post-earnings rally, PDD's shares traded at about 10 times trailing price-to-earnings (P/E), well behind the 22 for rival Alibaba (NYSE:BABA) (9988.HK) and 15 for JD.com (NASDAQ:JD) (9618.HK).

PDD explains that the squeeze it's now feeling is intentional as it makes its transition. On its earnings call, Co-Chairman and Co-CEO Zhao Jiazhen said 2025 was the company's biggest year yet for investment in "high-quality development." He cited a 100 billion yuan support program for merchants and said PDD's next phase would focus on deeper investment in the supply chain, even at the cost of weaker short-term profitability.

Zhao also said the company hoped to "build another Pinduoduo" – the name of its original signature service in China – over the next three years, indicating management wants investors to see the company less as a hyper-growth discount platform and more as operator of a vast supply-chain business.

PDD's shift is most reflected by where it is spending. On the earnings call, Zhao highlighted work in China's agricultural regions and industrial belts, fee cuts and support for manufacturers, and a logistics push that includes development of county-level transfer warehouses and village pickup points to bring more remote areas into free-shipping zones. Many of the company's core suppliers are manufacturers, who sell directly to users in price-sensitive smaller markets, allowing for its signature rock-bottom prices by cutting out costly middlemen.

The company said it had built delivery networks focused on such smaller markets in more than 10 provinces and municipalities, while its "new quality supply" programs were aimed at helping merchants upgrade their products, production and branding. Together, those measures suggest PDD is trying to broaden its usefulness to both sellers and consumers, and not just compete on price.

Tighter regulation at home

The company's domestic reset is also being pushed by a tighter legal and regulatory climate in China. A major flashpoint for merchants had been PDD's "refund without return" policy, which allowed buyers to get their money back without returning products. Authorities ordered major platforms to end that practice by July 2025. Since then, Beijing has moved more broadly against the kind of cutthroat conditions underpinning such lowest-price-at-any-cost model.

New pricing rules issued last December targeted tactics such as excessive fees and search-ranking penalties used to pressure merchants into lowering prices, while anti-monopoly guidance released last month warned internet platforms against collusion and unfair pricing. In March, Shanghai regulators gathered more than 40 major platforms, including PDD, for an antitrust compliance briefing that highlighted risks such as below-cost selling. In such a climate, PDD's latest efforts look like adaptation to a tighter regulatory climate as China tries to ease a "race to the bottom" business culture that often results in destructive competition.

The overseas story has required similar adjustment. PDD said its Temu global business now serves nearly 100 markets, but added its next phase will be focused less on user growth and more on compliance with tariffs, customs and product-safety rules.

After the U.S. last year closed a loophole that allowed low-value parcels mailed from China to enter the country duty-free, Temu's daily U.S. users fell sharply. Meanwhile, the EU is preparing a change that would eliminate a similar duty-free exemption for low-value parcels, and make platforms such as Temu responsible for duties and product-safety compliance.

On the earnings call, PDD Co-Chairman and Co-CEO Chen Lei said regulatory compliance had become the "baseline requirement" for the company's next global expansion phase. After winning scale in many overseas markets, the harder task for Temu now is proving it can operate under a much harsher trade and compliance regime than what it was used to in China.

PDD is also increasingly feeling the compliance challenge in its home China base. In January, Shanghai tax authorities fined the company 100,000 yuan for failing to submit required tax information. While the fine was relatively small, more important is what it says about PDD's operating environment: its second act is not just about operating highly efficient supply chains and logistics, but also about proving it can do so more responsibly.

Its decision to remain focused on its core e-commerce business also helps explain why PDD looks different from many of its larger internet peers. While those peers are leaning harder into AI in their investor messaging, PDD is still asking to be judged mainly as an e-commerce and supply-chain company.

By comparison, e-commerce leader Alibaba says AI "is and will continue to be one of our primary growth engines," while WeChat operator Tencent (0700.HK) says its core businesses are funding increasing investments in AI. JD said it integrated more than 50,000 AI agents into its internal workflows by the end of the fourth quarter. PDD's own message was much narrower, returning instead to merchants, logistics, compliance and the supply chain. That may make the company look less exciting, but it also means PDD is not asking investors to underwrite a large new AI spending cycle on top of its existing transition.

That may be the best way to understand why PDD's shares could rally after a mediocre quarterly earnings report and still trade at a relatively modest P/E multiple. Investors may be warming to the idea of a second act for the company built on better merchant relations, supply-chain depth, wider logistics and a more compliant Temu. But the low valuation suggests they are still waiting for proof that the company can make such a transition.

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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.