PDD Holdings (PDD) stock sank early Monday after the Temu parent company reported slower-than-expected sales growth for its second quarter. The China-based PDD, which also operates Pinduoduo, warned that increased competition will challenge its run of rapid revenue growth.

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For its quarter ended June 30, PDD Holdings said it earned an adjusted 23.24 yuan per American depositary share (ADS) from sales of 97.06 billion yuan, or $13.64 billion. Analysts polled by FactSet expected earnings of 20.43 yuan per ADS on sales of 100.2 billion yuan, or $14.1 billion

Adjusted earnings increased 122% year-over-year while sales increased 86% year-over-year in local currency. The sales growth marked a slowdown from the 131% rate PDD Holdings recorded in the first quarter of the year.

“Looking ahead, revenue growth will inevitably face pressure due to intensified competition and external challenges,” PDD Vice President of Finance Jun Liu said in a news release. “Profitability will also likely to be impacted as we continue to invest resolutely.”

In morning action on the stock market today, PDD stock is down more than 28% at 99.94, gapping down well below its 50-day and 200-day lines.

PDD Leadership Expects ‘Short-Term Sacrifices’

PDD stock surged last year, helped by the rapid rise of its international discount shopping site Temu, which has emerged as a challenger to Amazon (AMZN). Temu facilitates direct sales from Chinese manufacturers in dozens of countries and was the most downloaded app in the U.S. last year.

In China, Pinduoduo has challenged incumbents such as Alibaba (BABA) and JD.com (JD) by offering discounted items at a time consumer spending has been sluggish. Both Alibaba and JD have focused in recent quarter on offering discounts and promotions.

Even as it spent billions on advertising to grow Temu, PDD racked up strong earnings growth throughout 2023. Adjusted earnings per share jumped 70% year-over-year in for all of 2023, to 46.51 yuan per ADS.

But PDD Holdings is telling investors it may need to trade earnings growth to continue improve and grow its products.

“We will invest heavily in the platform’s trust and safety, support high-quality merchants, and relentlessly improve the merchant ecosystem,” Co-Chief Executive Lei Chen said in a news release. “We are prepared to accept short-term sacrifices and potential decline in profitability.”

Growing Competition

The pronouncement comes as consumers continue to pullback on spending in China. Both Alibaba and JD posted slower sales growth for their June quarters.

PDD is also competing with Alibaba’s AliExpress business in international markets, along with fast-fashion rival Shein and TikTok parent company ByteDance. Meanwhile, competitors who appeared caught off guard by Temu’s rise are starting to adapt.

In late June, The Information reported that Amazon was readying a Temu challenger. For the U.S. tech giant, Temu is a competitive threat for discount-hungry shoppers and for merchants selling out of China. A new section of Amazon’s website would reportedly sell goods directly from merchants in China. Similar to Temu’s operations, the section would offer cheaper prices but with longer shipping times.

Meanwhile, Temu’s direct-from-China model is under regulatory scrutiny. A bipartisan group of lawmakers unveiled legislation earlier this month that could change the “de minimis” provision U.S. trade policy. Currently, parcels valued under $800 can enter the U.S. duty-free, as long as they are addressed to an individual person.

European lawmakers are considering changing similar exemptions in EU trade policy, Bloomberg News reported last month.

The provisions have helped Temu keep costs down. PDD has previously acknowledged in regulatory filings that its operations could “materially and adversely affected” if existing tariff exemptions were no longer available.

On its earnings call Monday, Chen said that PDD’s global business is “still evolving” and had reached 70 markets.

“As our business develops, we have noticed that the changes in the external environment are accelerating and our operations are increasingly affected by some nonbusiness factors and we are seeing a significant increase in uncertainty,” Chen told analysts, according to a FactSet transcript. “Meanwhile, competition is a constant theme in the e-commerce industry and is expected to intensify.”

PDD Stock Sinks

Entering earnings Monday, PDD stock was down about 4% on the year but had bounced back from a slump earlier in the year. But Monday’s tumble has pushed PDD stock to its lowest levels since October 2023.

The stock sank below PDD stock’s 21-day, 50-day and 200-day moving averages.

Helped by its strong run of earnings growth, PDD stock entered trading Monday with a best-possible IBD Composite Rating of 99, according to IBD Stock Checkup. The score combines five separate proprietary ratings into one rating. The best growth stocks have a Composite Rating of 90 or better.

Further, PDD shares had an IBD Relative Strength Rating of 87 out of 99.

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