PDD Deep Research: Domestic Cash Business, Temu Globalization, and a Reassessment of Low Valuation

PDD Holdings (NASDAQ: PDD) In-depth Equity Research Report

Coverage Scope: PDD, Pinduoduo's domestic marketplace, and Temu; Taobao, JD.com, TikTok Shop, and Amazon are used only as references for the core e-commerce business and overseas competition.

Chapter 1: How to View PDD Now

The most attractive part of PDD today is still valuation, and the degree of cheapness is worth calculating first. Based on the July 7, 2026 closing price of $82.53, the company's trailing PE (price-to-earnings ratio, the multiple of share price relative to earnings per share) is about 8.8x, and forward PE is roughly 7.5-8.5x. At the end of the first quarter of 2026, PDD held RMB 436.1 billion in cash, cash equivalents, and short-term investments, equivalent to about $63.2 billion, or roughly $43-45 per ADS (American Depositary Share, PDD's trading unit in the U.S. market; all prices below are per ADS) based on publicly available share counts. After deducting this cash from the share price, the market is valuing the operating business at only $38-40 per ADS. If normalized earnings over the next two years fall in the range of $8.5-9.7 per ADS, the operating business is priced at just over 4x. That kind of multiple usually appears when profits are about to decline sharply, or when shareholders cannot access the company's cash.

The market has its reasons for pricing PDD this way, and each reason has a corresponding basis in financial statements and policy. Domestic marketplace advertising revenue has already entered a low-growth zone; Temu's revenue is scaling, but costs and cash flow have not provided confirmation of the same strength; the U.S. removal of the tax exemption for low-value parcels and the EU's introduction of parcel fees are both raising the cost of the cross-border low-price model; and management has pointed cash toward a supply-chain investment plan measured over a decade, while the company has never repurchased shares and has never paid dividends. In other words, the market is not debating whether PDD is cheap. It is questioning whether that cheapness can be realized by shareholders.

The 2026 first-quarter report provides the starting point for judgment. Total revenue was RMB 106.229 billion, up 11% year over year; online marketing services and others revenue was RMB 49.936 billion, up only 2.5%; transaction services revenue was RMB 56.293 billion, up 20% year over year, already exceeding online marketing revenue in scale. Of the RMB 10.557 billion in incremental revenue during the quarter, transaction services contributed RMB 9.343 billion. Domestic marketplace advertising is no longer the source of growth; Temu and deeper order services are carrying company growth.

Profit needs to be read one layer more carefully than revenue. Operating profit increased from RMB 16.086 billion to RMB 19.566 billion, up 22% year over year; net income, however, declined from RMB 14.742 billion to RMB 12.547 billion. The drag was not in the core business: other income/loss moved from a positive contribution of RMB 3.261 billion to a loss of RMB 2.031 billion, a single-item drag of about RMB 5.292 billion; interest and investment income moved from a positive RMB 223 million to a negative RMB 632 million, adding another drag of about RMB 855 million. Operating profit is improving, while reported net income is being pulled down by items below operating profit. This distinction is critical because it directly determines whether the statement "profit is getting worse" is valid.

All subsequent judgments can be reduced to one question: can PDD combine the cash-generating capacity of the domestic marketplace, Temu's overseas growth, and supply-chain investment into a path that ultimately leaves behind profits and cash? As long as online marketing revenue at the domestic marketplace remains stable at low growth and the sales expense ratio does not lose control, it remains a cash business. Temu is already the source of incremental revenue, but it still has to prove that execution costs such as fulfillment, payments, and returns can be absorbed by scale. Cash is abundant, but the value of cash depends on capital allocation, not on the balance itself.

Chapter 2: First Look at the External Environment: U.S. E-Commerce Is Still Growing, While Europe Places More Emphasis on Localization and Fulfillment

PDD's overseas opportunity cannot be assessed only through Temu itself. The U.S. and European e-commerce markets are still growing, but the growth pattern is already different from 2022-2023, when Temu had just gone overseas. In the early stage, Temu could expand rapidly through ultra-low prices, aggressive paid acquisition, and China-origin direct-shipped small parcels. Today, the constraints increasingly come from policy, fulfillment, returns, taxes and fees, and user retention.

The U.S. demand pool has not shrunk. According to the U.S. Census Bureau, seasonally adjusted U.S. retail e-commerce sales in the first quarter of 2026 were $326.7 billion, up 9.8% year over year, faster than the 3.9% growth in total retail sales over the same period. E-commerce accounted for 16.9% of total retail sales. Online penetration is still deepening. The issue has never been demand; it is the rules of this mature market. Amazon has already defined user expectations through search, Prime (a paid membership system whose core benefit is fast delivery), FBA (Fulfillment by Amazon, Amazon's warehousing and delivery service for sellers), and its returns system: products are likely to be reliable, delivery is fast, and returns are convenient. Temu's low prices can cut into price-sensitive demand, but to move from "cheap trial purchase" to "long-term repeat purchase," it must move closer to this expectation set in delivery, returns, product consistency, and customer service.

Europe has room, but the structure is more fragmented. Third-party market research estimates that the European e-commerce market will be about $0.73 trillion in 2026 and may reach $1.07 trillion by 2031, implying annualized growth of about 7.9%. CBRE's view on European e-commerce and logistics is closer to an investment context: sales volume is still growing, but penetration growth in most major markets has returned to a moderate track; the U.K., Germany, and France remain the largest markets, while Spain, Poland, and Ireland stand out more in growth; and stores and third-party logistics are playing a larger role in fulfillment. For Temu, Europe can diversify U.S. policy pressure, but VAT, product safety, consumer protection, returns, and customs clearance differ by country, and each country brings its own cost structure.

Eurostat's enterprise data adds an easily overlooked dimension. In 2024, among EU enterprises with web sales, 85.65% used their own websites or apps, while 45% used e-commerce marketplace platforms; by sales value, proprietary channels contributed more than platforms. In Europe, Temu is not only competing with Amazon, Shein, and TikTok Shop, but also with the digital channels of many local brands and retailers. Market share in this market will not shift among a few platforms as concentratedly as in the U.S.

At the global app level, Temu is no longer challenger-sized. Sensor Tower's 2026 e-commerce report shows that Amazon remains the world's largest company by cross-platform e-commerce scale, while Temu ranks second globally in mobile and web audience scale. Temu's mobile MAU (monthly active users) grew 24% year over year, faster than other major e-commerce apps; SHEIN's web unique visitors grew 70% year over year in the first quarter of 2026. But the same report also notes that downloads and time spent for global retail apps are declining, and that Temu's and SHEIN's expansion is slowing. This information matters more than the ranking: the phase of rapid expansion through downloads and aggressive paid acquisition has passed, and the next phase is about repeat purchase, organic traffic, fulfillment experience, and unit profit.

The adjustment path after U.S. policy changes is already visible. Sensor Tower's tracking of the tariff shock shows that nine months after the initial impact, Temu's advertising spend gradually recovered, but May-December ad spending was still 54% lower than in the seven months before the tariffs; app downloads declined 23%, ad impressions declined 65%, weekly time spent per user declined 19%, and the budget focus clearly shifted toward Europe. Digiday's 2026 reporting shows another side: from January to May, Temu's U.S. downloads still remained between 5.5 million and 6.8 million per month, and Sensor Tower also confirmed that Temu's U.S. monthly active users grew 21% year over year. The two sets of data point to the same change: U.S. demand has not disappeared, Temu has voluntarily reduced paid acquisition intensity, user scale remains, and acquisition and repeat-purchase efficiency have replaced growth rate as the key variables.

This is the background that must be established before reading PDD's financials: U.S. e-commerce is still growing, Europe still has room, and the Temu app still has scale, but the policy dividend for cross-border low-price growth is shrinking. Competition in overseas e-commerce is shifting from low prices and downloads toward fulfillment, retention, compliance, and merchant costs.

Chapter 3: What Exactly Does PDD Earn Money From?

After reviewing the external environment, return to the company itself. The first step in judging PDD is not to look at growth rate, but to clarify where its money comes from, because its revenue recognition differs from that of most e-commerce companies.

PDD recognizes most revenue as platform service fees, not as gross merchandise value (GMV, the total merchandise value of completed transactions on the platform). What users see are product prices and orders; what appears in the financial statements is the service revenue that PDD retains from merchants and transaction links. This accounting basis means PDD's revenue cannot be directly compared in size with self-operated retail revenue such as JD.com's, and it also means the analytical focus is always on "what the platform retains from each transaction and what it pays to retain it."

Revenue has two lines. Online marketing services and others revenue is the money merchants pay for exposure, clicks, ranking, recommendations, and conversion opportunities. If merchants want a product to enter search results, recommendation feeds, or promotional positions, they buy traffic from the platform. Revenue is recognized when impressions, clicks, or marketing services have occurred. How much product is ultimately sold affects whether merchants buy the next round of traffic. This revenue line is relatively light; costs mainly consist of recommendation systems, servers, and operations.

Transaction services revenue sits closer to the order itself. After a transaction is completed, the platform charges around transaction processing, settlement, fulfillment organization, payment processing, returns, and merchant services. Revenue is tied to order scale, transaction links, and service depth. Temu's cross-border organization, local warehouses, semi-managed model (merchants stock goods in overseas warehouses, while the platform is responsible for traffic, pricing, and part of fulfillment), overseas payments, and customer service all fall into this line. Revenue is deeper, and cost of revenue is more sensitive.

The speed of the structural shift is worth recording. In full-year 2025, of total revenue of RMB 431.846 billion, online marketing accounted for 50.4% and transaction services accounted for 49.6%; by the first quarter of 2026, the two had become 47.0% versus 53.0%, with transaction services exceeding advertising for the first time at the quarterly level. The existing base is already roughly split in half, and the incremental revenue is almost entirely from transaction services.

One default assumption must be separated here: transaction services does not equal Temu. This revenue line mixes at least three things: transaction commissions related to the domestic marketplace and the 10-billion-yuan subsidy program, Duoduo Grocery and local fulfillment, and Temu cross-border transaction services. PDD does not disclose the breakdown. A usable rough estimate (not company disclosure, but an analytical assumption) is that domestic marketplace-related fees may account for 15%-30% of transaction services revenue, Duoduo Grocery and other local businesses may account for 0%-10%, and Temu plus cross-border transactions may account for 60%-85%. This range cannot serve as segment reporting, but it defines the boundary of the narrative: the high growth in transaction services is most likely mainly from Temu, but not entirely from Temu.

Third-party estimates can be used to cross-check this range once, while also clarifying the deeper nature of this revenue line. First, be clear about the data: PDD does not disclose Temu's GMV or revenue, and all numbers below come from third-party estimates. They are used only to understand order of magnitude and should not be cited as company data. ECDB estimates Temu's 2025 GMV at about $92.5 billion, equivalent to roughly RMB 660 billion. If 60%-85% of the RMB 214.063 billion in 2025 transaction services revenue belonged to Temu, or RMB 128.5-182.0 billion, then the rough ratio of "revenue attributable to Temu / Temu GMV" would fall between 19% and 28%.

One misreading must be avoided here: this ratio is not Temu's commission rate. It is only an aggregate comparison of revenue and transaction value. The numerator mixes fulfillment service fees, settlement and payment-related fees, platform service fees, and other types of revenue. Under fully managed and semi-managed models, the platform handles logistics and collection for merchants, and the fees for those services are also recognized as revenue, so the ratio is naturally high. Moreover, the numerator and denominator are not aligned in accounting basis to begin with (company-disclosed revenue versus third-party estimated GMV). This rough calculation has only one real use: it proves that transaction services is a "heavy revenue" line, with fulfillment and payment service attributes embedded in revenue. Every increment of revenue brings a corresponding increment of execution costs. Therefore, transaction services gross margin should never be imagined using the standards of domestic advertising. Investors should watch the spread between revenue growth and cost growth, not revenue itself.

The two revenue lines therefore require completely different validation methods. The core question for online marketing services is merchant advertising return: whether a merchant can earn back the RMB 1 spent on advertising determines the ceiling of this revenue line. The core question for transaction services is execution cost convergence: after the platform assumes deeper transaction responsibilities, can scale push down the unit cost of fulfillment, payments, and returns? For the former, watch advertising revenue, the sales expense ratio, and the merchant ecosystem. For the latter, watch the cost-of-revenue ratio and operating cash flow. Mixing the two lines into a single "revenue growth" metric is the most common mistake in reading PDD.

Chapter 4: Domestic Marketplace: Advertising Revenue Is Slowing, but the Cash Business Remains

The domestic marketplace has already passed the high-growth stage. China's e-commerce market has entered stock-based competition, with Taobao, JD.com, Douyin, and Xiaohongshu all competing for user time, merchant budgets, and low-price mindshare. PDD's online marketing services and others revenue in the first quarter of 2026 increased only from RMB 48.722 billion to RMB 49.936 billion, up 2.5% year over year.

This 2.5% needs an external reference to have meaning. According to China's National Bureau of Statistics, national online retail sales of goods in the first quarter of 2026 were RMB 3.1614 trillion, up 7.5% year over year. The industry market is still expanding at a mid-single-digit or higher rate, while PDD's advertising revenue is growing only in the low single digits, leaving a 5-percentage-point gap. There are only two explanations for this gap, and they carry completely different valuation implications.

The first is that PDD's GMV growth lagged the market: low-price share was taken by Taobao's low-price counteroffensive and Douyin e-commerce, which would mean the domestic marketplace has a share problem and the quality of the cash cow is declining. The second is that GMV broadly kept up with the market, but the platform was proactively sharing economics: merchant support, fee reductions, and logistics subsidies for remote areas lowered the monetization rate (the revenue the platform actually receives from each RMB of transaction value). In that case, this is management's choice to exchange short-term revenue for the merchant ecosystem, with room for monetization to recover in the future.

The company does not disclose GMV, so this cannot be judged directly, but the two explanations leave different traces. If it is profit sharing, management will continue to emphasize merchant support and the scale of fee reductions on earnings calls, and merchant ecosystem indicators should improve. If it is share loss, express parcel volume share, third-party GMV tracking, and merchant surveys should send signals first. Over the next one or two quarters, this is the single most important issue to distinguish for the domestic marketplace.

Low growth itself does not overturn the cash-business judgment. Advertising revenue at a mature e-commerce platform depends on merchant advertising return; user growth is only one component. Merchants spend money on PDD so their products can be seen by more price-sensitive users and converted into orders as quickly as possible. As long as merchants can still sell products and make money after advertising, the platform can continue collecting marketing service fees. PDD's advantage lies in low-price mindshare and product-level efficiency: when users open Pinduoduo, they often do so with the mindset of "is there a cheaper option for this kind of thing?" The platform does not require users to know the store or brand first; product feeds, search, campaigns, and rankings directly drive conversion. For merchants, the causal chain of advertising is short and the results are visible.

The same mechanism is also its weakness. PDD's merchant budget is closer to immediate conversion budget than Taobao's, and is more sensitive to changes in merchant profit. Low prices, advertising, campaigns, return disputes, and platform fees together squeeze merchant profits. Once merchants cannot make money after advertising, budgets shrink faster than on brand-oriented platforms, and supply quality then declines. The domestic marketplace's profit pool is not protected by users alone. It is protected by whether merchants can still make the numbers work.

Taobao provides a reference under low-speed growth. Alibaba's fiscal 2026 e-commerce business revenue was RMB 449.385 billion, up 4% year over year; customer management revenue grew 5%, and comparable growth was 7% after excluding the reduction in reported revenue from merchant support. Mature platforms' merchant operating revenue can be low-growth yet resilient, as long as merchants are willing to keep long-term operating budgets on the platform. The difference lies in what they sell to merchants: Taobao sells an operating environment composed of search, stores, brand display, memberships, livestreaming, and repeat purchase, while PDD sells something closer to "the opportunity for a product to be seen and quickly converted." PDD is more efficient and has a shorter path, but it has less room for brands and long-term operations, and its budgets are more volatile.

JD.com is the other mirror. JD.com's core e-commerce business derives a large amount of revenue from merchandise sales, while bearing product costs, warehousing, delivery, and after-sales service. User trust comes from authentic products, speed, and certainty. This capability raises user quality but also suppresses profit margins. Citing JD.com is not to say Temu is becoming JD.com; Temu remains PDD's own cross-border platform. JD.com's value as a reference is to remind us that once a platform assumes more fulfillment and after-sales responsibility, revenue becomes larger and costs become heavier. This financial phenomenon is now appearing in Temu.

What matters most for the domestic marketplace now is operating profit and cash under low growth. If online marketing revenue is low-growth but stable, the sales expense ratio does not rise again, and operating cash flow keeps up with operating profit, this business remains PDD's cash base. If online marketing revenue slides toward stagnation and the platform has to rely on more marketing expense and merchant support to maintain the ecosystem, the valuation of the domestic marketplace should be lowered. That is exactly why the earlier question of "share loss or profit sharing" is so important.