PDD's Q2 revenue was soft and profit slightly exceeded expectations; operations are normalizing, but growth headwinds persist

Overview

The report assesses PDD's second-quarter 2026 results and strategic changes. Bernstein considers the quarter broadly "acceptable": revenue was slightly below market expectations due to domestic and overseas headwinds, while operating profit modestly exceeded expectations. The company continued to execute in a difficult environment, but the decline in the domestic monetization rate, potentially low incremental margins in lower-tier markets, and Temu's continuing losses keep the overall view neutral.

Core views

PDD's Q2 revenue performance was soft, but profitability was slightly better than market expectations. Group revenue was RMB 1124 hundred million, up 8.1% year over year and broadly in line with Bernstein's own estimate of RMB 1130 hundred million, but 2.5% below the market consensus of RMB 1150 hundred million. The report attributes the revenue pressure to weak domestic macro demand and a high comparison base, as well as factors such as overseas competition and European tariffs. Meanwhile, non-GAAP operating profit increased 4.8% year over year; the report and charts primarily show RMB 291 hundred million, slightly above the market expectation of RMB 284 hundred million, while another passage in the main text shows RMB 297 hundred million. Bernstein believes that for a company of PDD's scale, a profit difference of more than RMB 10 hundred million has limited explanatory power by itself. More noteworthy is management's renewed willingness to present above-expectation results and discuss long-term fundamentals, which may help repair market expectations that have already fallen to relatively low levels. At the strategic level, management emphasized supply-chain investment and growth in self-operated businesses. The scope of the RMB 1000 hundred million merchant support program has been expanded to upstream and downstream partners, and the company hopes to use it to advance the expansion of unbranded goods, although the report states that progress has so far been slower than expected. This direction means that PDD is not relying solely on platform traffic and transaction-matching monetization, but is also strengthening supply-chain coverage and seeking additional sources of self-operated growth. The domestic business continues to seek incremental opportunities in lower-tier cities and even smaller regions, but Bernstein believes the marginal profitability of these new businesses may be relatively low, meaning transaction-volume growth may not translate proportionally into profit growth. The revenue mix shows that domestic commercialization efficiency remains under pressure. Online Marketing Services revenue was RMB 576 hundred million, up 3.5% year over year, below the high-single-digit domestic GMV growth indicated by channel feedback. Based on revenue and transaction volume, Bernstein estimates PDD's domestic blended monetization rate at approximately 5.0%, down approximately 20 basis points year over year. The report also notes that industry channels indicate the company may have netted some marketing costs against revenue, so changes in reported revenue and the monetization rate may not fully reflect a weakening in operating activity. Transaction Services revenue was RMB 547 hundred million, up 13.3% year over year, between Bernstein's estimate of RMB 528 hundred million and the market consensus of RMB 584 hundred million. The profit structure was better than the revenue growth rate. Group gross margin was 57.3%, up 140 basis points year over year; group non-GAAP operating profit was approximately RMB 291 hundred million, equivalent to 1.9% of GMV. Non-GAAP earnings per share were RMB 19.33, below RMB 22.07 in the same period last year. Group marketing expenses, excluding share-based compensation, were RMB 293 hundred million, below Bernstein's previous model of RMB 328 hundred million. The company also recorded RMB 135 hundred million in interest and investment income, up approximately 30% year over year, while reporting a RMB 74 hundred million "net loss from other income"; the report views the latter as an insufficiently explained profit-and-loss item for the quarter. For Temu, Bernstein works backward using Pathmatics advertising-spending data, group marketing expenses, and income-tax payments. Pathmatics data show that Temu's Q2 marketing spending declined approximately 14% year over year and approximately 25% from Q1. Income-tax payments for the quarter were RMB 61 hundred million, and the report assumes a tax rate of 15% to 20% when estimating domestic profit. Based on this information, Bernstein estimates that Temu incurred an overall loss of approximately RMB 20 hundred million to RMB 30 hundred million in the second quarter of 2026. The report believes PDD's overseas business continues to demonstrate execution resilience, but it faces competition, tariffs, and a geopolitical environment in which host-country institutions are not particularly supportive of its expansion. Market performance reflects the backdrop of low expectations. As of the period presented in the report, PDD's absolute returns year to date, over the past month, over the past six months, and over the past twelve months were -22.1%, 6.9%, -17.3%, and -30.5%, respectively. Its corresponding performance relative to the S&P 500 was -34.2, 4.7, -28.4, and -50.9 percentage points. Bernstein therefore believes that market expectations have already declined significantly. The company's willingness this quarter to demonstrate above-expectation profitability and discuss long-term fundamentals may improve confidence to some extent, but it is not sufficient to change the neutral rating. The forecast table shows F25A, F26E, and F27E revenue of 431846, 471377, and 535092, respectively, with the original table denominated in M and a compound growth rate of 11.3%. Gross profit is 243044, 259804, and 291224, respectively, with a compound growth rate of 9.5%; operating profit is 102561, 104679, and 119128, respectively, with a compound growth rate of 7.8%; and net profit is 107301, 99443, and 124656, respectively, with a compound growth rate of 7.8%. The corresponding adjusted P/E ratios are 8.2 times, 8.9 times, and 7.2 times, respectively; EV/Sales ratios are 1.0 times, 0.9 times, and 0.8 times; and EV/EBIT ratios are 4.3 times, 4.6 times, and 3.6 times. Bernstein values PDD at 9 times FY+1 earnings, meaning earnings from future quarters 5 through 8, deriving a target price of US$110 per share and maintaining its Market-Perform rating.

Analysis framework

Bernstein first compares quarterly revenue and operating profit with its own forecasts and market consensus expectations, then breaks down Online Marketing Services and Transaction Services revenue and uses the relationship between GMV and revenue to assess changes in the domestic monetization rate. The report subsequently analyzes the profit structure by combining gross margin, marketing spending, taxes, interest and investment income, and other gains and losses, and uses Pathmatics advertising-spending data and tax-rate assumptions to infer Temu's losses. Finally, it incorporates its operating assessment into financial forecasts and determines the target price using an FY+1 P/E multiple.

Methodology notes

• Event-Driven Trading and Behavioral FinanceExpectation Gap/Expectation Management

  Comparison of results with institutional forecasts and market consensus expectations

  The report compares actual revenue and operating profit with Bernstein's forecasts and market consensus expectations to determine whether the quarter fell short of or exceeded expectations, and then analyzes whether the company's renewed delivery of above-expectation profitability could improve confidence.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Decomposition of GMV growth, revenue growth, and the blended monetization rate

  The report compares the growth rate of Online Marketing Services revenue with domestic GMV growth and estimates a blended monetization rate of approximately 5.0% to distinguish between changes in transaction-volume growth and commercialization efficiency per unit of transaction volume.

• (Method Outside the Vocabulary)

  Inferring Temu's profit using advertising spending, marketing expenses, taxes, and tax-rate assumptions

  Because the report does not directly disclose Temu's profit and loss, Bernstein references Pathmatics marketing spending, group expenses, and RMB 61 hundred million in income-tax payments, while assuming a domestic profit tax rate of 15% to 20%, to estimate Temu's Q2 loss at RMB 20 hundred million to RMB 30 hundred million.

• Valuation MethodPE/PEG valuation

  FY+1 P/E valuation

  Bernstein applies a 9 times P/E multiple to FY+1 earnings corresponding to future quarters 5 through 8, deriving a target price of US$110 per PDD share.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• PDD Holdings Inc. (PDD.US)

  The U.S.-listed Internet retail company directly covered by the report, whose results are driven jointly by its domestic e-commerce platforms, Temu, and other businesses.

  Strengths

  The group continued to achieve revenue growth in a difficult environment, operating profit slightly exceeded expectations, gross margin increased 140 basis points year over year, and Transaction Services revenue grew 13.3%.

  Weaknesses

  Group revenue was below market consensus, Online Marketing revenue grew only 3.5%, the domestic blended monetization rate declined year over year, incremental margins in lower-tier markets may be relatively low, and Temu still had an estimated loss of RMB 20 hundred million to RMB 30 hundred million.

  Comparison

  Q2 revenue was close to Bernstein's own forecast but 2.5% below market consensus; operating profit was slightly above market expectations.

  Risks

  Macro consumption, user engagement, platform competition, regulation, and losses from new businesses could all affect results and valuation.

Key data

• Group Revenue in the Second Quarter of 2026RMB 1124 hundred millionUp 8.1% year over year; 2.5% below the market consensus of RMB 1150 hundred million and close to Bernstein's estimate of RMB 1130 hundred million.
• Online Marketing Services RevenueRMB 576 hundred millionUp 3.5% year over year, below the high-single-digit domestic GMV growth indicated by channel feedback.
• Transaction Services RevenueRMB 547 hundred millionUp 13.3% year over year; between Bernstein's estimate of RMB 528 hundred million and the market consensus of RMB 584 hundred million.
• Domestic Blended Monetization RateApproximately 5.0%Bernstein estimates a year-over-year decline of approximately 20 basis points.
• Group Gross Margin57.3%Up 140 basis points year over year.
• Non-GAAP Operating ProfitRMB 291 hundred millionUp 4.8% year over year and slightly above the market expectation of RMB 284 hundred million; another passage in the main text shows RMB 297 hundred million.
• Non-GAAP Operating Profit as a Percentage of GMV1.9%Second quarter of 2026.
• Non-GAAP Earnings per ShareRMB 19.33RMB 22.07 in the same period last year.
• Group Marketing SpendingRMB 293 hundred millionExcluding share-based compensation and below Bernstein's model of RMB 328 hundred million.
• Estimated Temu LossRMB 20 hundred million to RMB 30 hundred millionBernstein's estimate for the second quarter of 2026.
• Change in Temu Marketing SpendingDown approximately 14% year over year and approximately 25% quarter over quarterBased on Pathmatics Q2 data.
• Interest and Investment IncomeRMB 135 hundred millionUp approximately 30% year over year.
• Net Loss from Other IncomeLoss of RMB 74 hundred millionThe report believes this profit-and-loss item lacks sufficient explanation.
• F25A/F26E/F27E Revenue431846 / 471377 / 535092The original table is denominated in M, with a compound growth rate of 11.3%.
• F25A/F26E/F27E Adjusted P/E8.2 times / 8.9 times / 7.2 timesValuation metrics presented in the report.
• Target-Price Valuation Benchmark9 times FY+1 P/EFY+1 refers to future quarters 5 through 8, corresponding to a target price of US$110.

Impact & implications

The report believes that PDD's ability to achieve revenue growth and slightly exceed profit expectations amid macro-demand weakness, overseas competition, tariffs, and geopolitical pressure demonstrates reasonable execution. However, Online Marketing revenue lagging GMV, the decline in the domestic monetization rate, potentially low incremental margins in lower-tier markets, and Temu's continued losses limit the magnitude of earnings improvement. Investment in the supply chain and self-operated businesses may broaden long-term growth avenues, but unbranded-goods expansion has been slower than expected, so Bernstein has not changed its neutral view.

Risks

• A deterioration in the macroeconomic and credit environment may suppress retail consumption.
• User engagement with PDD's platforms may fluctuate.
• Competition from other Internet platforms may affect transaction growth and monetization capabilities.
• Regulatory changes, including China's antitrust regulation, may affect operations.
• Losses from new businesses such as community e-commerce may exceed expectations.

What to watch

• Monitor whether GMV growth in domestic e-commerce and Temu exceeds the report's expectations.
• Track the gap between Online Marketing revenue growth and domestic GMV growth, as well as whether the blended monetization rate can stabilize.
• Monitor supply-chain development and unbranded-goods expansion after the RMB 1000 hundred million merchant support program was extended upstream and downstream.
• Track changes in Temu's marketing investment, competition, tariffs, and quarterly losses.
• Monitor whether growth in lower-tier cities and smaller regions can generate sustainable marginal profit.
• Monitor subsequent explanations and changes relating to the RMB 74 hundred million net loss from other income.