Temu parent stock collapses on fears of fierce rivals and government scrutiny

The Nasdaq-listed company, which is technically headquartered in Ireland but employs most of its workers in China, runs the Chinese online shopping giant Pinduoduo as well as Temu, the discount shopping app that has taken the U.S. and other Western markets by storm since it launched in 2022. But Temu has also faced intense scrutiny by governments, including that of the U.S., over issues ranging from its use of import trade loopholes, to the quality and origins of the products its sellers hawk through its online stores. And those pressures seem to be affecting the company’s outlook.

PDD is still scaling incredibly quickly both in China and in other markets, with revenue growing 86% in the second quarter to more than $13.6 billion, but analysts had been expecting more than $14 billion in sales. On top of that revenue miss, PDD executives spooked investors by painting a cloudy picture of future quarters.

“Looking ahead, revenue growth will inevitably face pressure due to intensified competition and external challenges,” Jun Liu, PDD’s financial chief, said in a press release. “Profitability will also likely … be impacted as we continue to invest resolutely.”

Amazon officials in China recently told merchants there that the U.S. e-commerce giant would soon launch its own low-price storefront. Temu also competes with other e-commerce giants with deep China ties, including fast-fashion titan Shein and TikTok’s rapidly growing Shop marketplace.

Though PDD Holdings does not break out Temu’s financial results, executives warned on a call with analysts of “significantly greater uncertainty” in the company’s global business unit, which houses Temu.

“Our operations [have] also become increasingly affected by nonbusiness factors,” said co-CEO Lei Chen. “And meanwhile, the competition we face is growing stronger. Competition is here to stay and is expected to intensify in our industry.

“These factors combined will inevitably cause fluctuations to our business,” Chen added. “As shown in this quarter’s results, high revenue growth is not sustainable, and a downward trend in profitability inevitable.”

A push for ‘high-quality’ merchants

Temu has grown into one of the most popular shopping apps in the U.S. and other markets like Mexico’s, thanks to its tantalizing cocktail of bargain-basement pricing, often-passable product quality, and heavy advertising spending with in-app gimmicks that lure back buyers who enjoy the hunt for deals. Temu calls Boston its headquarters, but Fortune previously reported how that is basically in name only.

But the company has also increasingly come under attack by regulators and lawmakers over some of its shipping tactics, adherence to product safety laws, and questions over whether it sells merchandise made by forced labor.

Just this month, U.S. lawmakers on both sides of the political aisle announced legislation that would make it more expensive for foreign companies like Temu to ship merchandise from China to U.S. customers. Currently, most Temu orders shipped to the U.S. avoid import taxes and customs scrutiny thanks to a trade rule known as “de minimis” that allows customer packages under an $800 threshold to bypass import costs.

PDD executives also vowed to invest heavily in increasing the quality of sellers on its shopping marketplaces, in part by rewarding high-quality merchants with lower fees.

“On the supply side, we will invest substantial resources to support high-quality merchants who are willing to innovate and improve qualities,” said Chen. “And we will offer significant transaction fee reduction to these merchants, with an initial target of 10 billion [yuan] in the first year.”