Pinduoduo - Game over?

Pinduoduo: From Fraud to Failure?

Pinduoduo: From Fraud to Failure in Record Time

It’s remarkable how quickly the market rewrites its own stories. Just a few months ago, Pinduoduo was too profitable to be real—clearly a fraud. Now, after one disappointing quarter (which, by the way, played out exactly as management warned nine months ago), the very same experts are calling it just another worthless Chinese shitco.

Every earnings release sends Pinduoduo’s stock into a 15–20% tailspin, in either direction. That kind of volatility is rare for a company of this size and usually reserved for small caps or biotech lottery tickets. Yet here we are, watching a $200 billion business trade like it just released a Phase 2 trial result.

Pinduoduo’s management communicates as if they were electing the next Pope. They disclose the bare minimum, avoid all forms of guidance, and show zero interest in engaging with analysts—no matter how many times they beg for help modeling margins or forecasting growth. The attitude is roughly equivalent to: figure it out yourselves.

In that vacuum, consensus estimates become comedy. Every quarter, I see people post them online as if they’re gospel. Personally, I think you’d get better estimates by handing a few blind people a pile of goat intestines. There’s nothing inherently wrong with making estimates, but let’s not pretend it’s science when the inputs are missing and management won’t talk. Classical bullshit in bullshit out.

Of course, in businesses where guidance is clear and predictable, you can model things out. It’s easy—and also boring. If a CEO gives you the numbers directly, you’re not forecasting; you’re just doing homework. We all can do linear extrapolation.

That’s not the case here. Because Pinduoduo keeps everyone in the dark, the earnings reactions are extreme. Misses and beats aren’t small deviations—they’re cliff dives or moonshots. Just yesterday, I saw someone tweet, “This company is impossible to model. I drop coverage now.” Apparently, it took him until Q1 2025 to realize that. Better late than never.

All of this makes Pinduoduo an outlier—and people hate outliers. Think of investing like playing poker: you know the rules, the probabilities, and the deck. The rest is a combination of skill and luck. Pinduoduo, on the other hand, feels like a game where you don’t even know what’s in the deck. Maybe it’s all aces. Maybe there are no aces.

This additional layer of uncertainty freaks people out. But, it doesn’t necessarily make it a bad setup. If nobody knows the deck, then everyone is equally blind. That’s not additional risk. As Richard Zeckhauser put it, the best investments often live in the realm of the unknown and unknowable. And this one certainly qualifies.

Pinduoduo’s shares trade on the stock market. Someone has to own them. The only question is whether you want to sit at the table.

The Numbers

Okay, that was the setup. Now let’s have a quick look at the numbers.

Revenue increased 10%.

Breaking it down:

• Revenue from online marketing services—essentially their China business—increased 15% - not bad at first glance.

• Revenue from transaction services, which includes Temu and Duoduo Maicai, increased 6% year-over-year.

Operating profit decreased 38%.

Net income decreased 47%.

Apparently, these results shell shocked some people. And yes, if you care about these things, the results wildly missed analyst estimates—though I imagine most models were built on the same data foundation as horoscopes.

But let’s be fair to the analysts. Pinduoduo’s earnings are genuinely difficult to interpret.

Take the 6% growth in transaction services revenue, which includes Temu and Duoduo Maicai. On paper, that’s a number. In practice, it tells us almost nothing.

The issue is structural. Temu has been operating under at least three different models: fully managed, semi-managed, and a 3P platform. Each has a completely different revenue recognition and margin profile¹. The actual mix? Unknown. And from everything we’ve heard, that mix is anything but stable.

U.S. tariffs are already having a huge impact on the mix of Temu’s operating models—and next quarter that impact will likely be even more extreme, because Trump’s “Liberation Day” only took effect in the second quarter. Tariffs came on and off. Throughout, Temu has likely been shifting between operating models to correspond to either direction of policy, adding yet another layer of noise to already opaque financials.

So when you see that 6%, you’re not seeing a stable trend or a clean business line. You’re seeing the midpoint of a constantly shifting strategy. Without knowing the model mix, the number has no anchor.

Now back to the numbers.

Cost of revenue rose 25%, driven by higher fulfillment fees and payment processing costs—most likely linked to tariffs. That part wasn’t surprising.

The real surprise was on the cost side: total operating expenses jumped 37%—in what’s supposed to be an off-season quarter.

Some reports suggest Pinduoduo already started cutting back on U.S. marketing spend in response to the tariffs. It’s not entirely clear which quarter that reduction falls into, but assuming that’s true, most of the sales and marketing expense this quarter likely went toward the domestic business.

Which makes that 15% growth in online marketing revenue—Pinduoduo’s core China business—look a little less impressive.

Despite holding even more cash, Pinduoduo’s interest and investment income mysteriously evaporated—down from 5 billion RMB in Q1 2024 to just 220 million this quarter. Was the cash not real after all?

We’ll never know. Analysts didn’t bother to ask. They were too busy begging again for margin guidance, as if this time might be different.

What Management had to say

People usually bring out the straightjacket when I say this, but I actually like Pinduoduo’s earnings calls. Yeah, you heard that right. Sure, they don’t give margin guidance or break down the business in any useful way—but I don’t need that to invest.

Most companies have perfected the art of talking a lot while saying nothing. Pinduoduo, on the other hand, doesn’t bother with 10-minute monologues about gamified widgets in their app. They don’t say much—but when they do, it usually matters. If they tell you the next quarter will be rough, it will be rough.

In their now-infamous Q2 2024 earnings call, Pinduoduo said exactly that—and it was just one of eight separate moments where they brought up profitability.

In this process, we will inevitably face short-term costs, as Lei has mentioned. Our managing team is fully committed to investing heavily for the long-term health of our platforms. While profits might vary or even rebound in the next few quarters, it is unavoidable that profitability will trend lower over the long term.

PDD Q2 2024 call

But apparently the attention span of investors isn’t long enough. Either they didn’t believe it, or they just couldn’t remember. No matter what, now they act surprised.

After squeezing merchants hard enough to trigger social unrest, I correctly suspected a quiet government nudge was involved—prompting the Q2 2024 earnings call as a way to reset investor expectations. And now, unsurprisingly, Pinduoduo is all over merchant support.

But they’re not alone. Every major platform player is suddenly singing from the same hymn sheet. I wouldn’t be surprised if there’s coordinated pressure behind the scenes—I’ve already seen hints of that, even from semi-official channels. Something heavy is moving in the background.

Pinduoduo launched a 100 billion RMB merchant support program, aiming to lower fees and improve the business environment on the platform.

Management explained the drop in earnings this quarter with an overarching theme: merchant support. But they also gave specific reasons:

1. Government incentives to consumers are hard to implement for a third-party marketplace. They already admitted this two quarters ago, saying “we screwed that one up.” Again if they say something it’s worth listening! So now, they’re matching the missing government subsidies out of their own pocket, to keep their merchants competitive. This is obviously a major drag on earnings.

2. Tariffs are putting pressure on merchants, who lack the capacity to adapt quickly.

   In response, Pinduoduo is offering a 10 billion RMB fee reduction program to help merchants grow.

   This marks a notable shift. In the early days of the company, the focus was solely on users. Now, management insists that the platform’s health depends on the collective success of its merchants.

   Our management team believes that in the fast-changing market where merchants are facing challenges, it's our obligation to invest decisively to support consumers and merchants, putting their needs ahead of those of the platform.

   PDD Q1 2025 call

Pinduoduo’s New Playbook

The rest of this article is for my paying subscribers, where I share how I personally think about Pinduoduo’s investability—what I watch, what I ignore, and where I think others might be looking in the wrong place.

The narrative Pinduoduo is now promoting is straightforward: help merchants earn more, so they can improve their products and capabilities, which in turn leads to better offerings on the platform—and ultimately, higher prices and higher platform revenue. A self-reinforcing loop.

And we believe that these initiatives are investments that will ultimately lead to a stronger and higher-quality merchant ecosystem over the long run. This effort will likely weigh on our profitability in the short-term and even for a considerable period of time to come.

PDD Q1 2025 call

Again, if they say something, it’s worth listening. But give it two weeks—most people will have forgotten it ever happened.

At a time when Pinduoduo was delivering over 100% earnings growth—while squeezing merchants hard enough to trigger public backlash—it’s now confirmed that the government stepped in. That was the moment the company flipped the switch. Management still sees significant growth potential, which is why they’ve chosen to invest decisively now, bring earnings growth down, and focus on increasing long-term intrinsic value.

They described these efforts as long-term investments and reported early signs of success: some merchants are beginning to shift from traditional OEM thinking to a more distribution- and brand-driven mindset.

Thinking in Uncertainty: How to Approach Pinduoduo as an Investor

Two obvious things first. If you think the company is a fraud, don’t invest. Just don’t. Save your good night’s sleep. It’s important to invest in things that match your personality. Second, if you try to model the company, close your spreadsheet and throw your computer out the window. That path will inevitably lead to disaster.

Back to the picture I used earlier: we’re playing poker, but we don’t even know what’s in the deck. The real question is—how do you invest in a situation like that?

Remember—the information asymmetry is the same for everyone. And that’s precisely why it might be possible to take advantage of the situation if you find the right angle.

In a situation like this—where visibility is low and conventional modeling breaks down—I see two rational approaches.

The first is to trust the track record. Forget the noise, and focus on what management has actually delivered: high returns on capital, strategic discipline, and a proven ability to pivot under pressure. If you believe the same team, under similar incentives, can keep allocating well, that may be enough. Past performance isn’t predictive—but in the absence of guidance, it’s often the best signal you’ll get.

The second borrows from Richard Zeckhauser’s concept of sidecar investing: when you can’t see the road, ride with someone who can. In this case, Tencent might be that someone. They have a board seat, a long-term orientation, and—perhaps most importantly—access to real-time WeChat Pay data that offers a live view into Pinduoduo’s actual transaction flow. You don’t know the deck. But Tencent probably sees a few of the cards.

But wait a moment!

Every time I make this argument, I get huge pushback. You can’t just trust other investors, for example Tencent in this case. But here’s what I believe: most investors massively overestimate their ability to truly understand companies and judge their decisions or competitive advantages.

Why? Because we don’t have the data.

Take Meituan’s expansion into Saudi Arabia and Brazil. Does that make sense? I have no idea. And unless you work at Meituan, a competitor, or happen to be a senior exec at a delivery platform, you don’t either. We lack visibility into the unit economics, cohort performance, or local regulatory dynamics. Yet people still form strong opinions.

Same goes for AI. Will the massive investments from U.S. and Chinese tech firms pay off—or are they just burning through free cash chasing a commodity? I don’t know. And frankly, at the moment of decision, nobody knows with certainty—not even management.

Even inside companies, these calls aren’t obvious. I remember reading that within Amazon, there were intense debates over whether opening AWS to third parties was a smart move or a strategic giveaway. It turned out to be brilliant.

On the other hand, look at Meta’s metaverse pivot. The hype was so loud even Beijing started drafting rules for it. Now it’s basically dead.

But good management can change course. Zuckerberg dropped the metaverse narrative when it stopped working—and Meta’s stock price soared.

In the realm of the unknown and unknowable—the competitive edge often comes not from knowing more, but from ignoring more. The impulse to model, to forecast, to extract precision from noise is understandable—but misplaced. In environments like this, the smartest move is often to resist the urge to overfit the unknowable and instead focus with discipline on the few variables that are actually observable. Judgment improves not by widening the lens, but by narrowing the scope to what is knowable.

Outlook

Pinduoduo told us clearly: earnings will remain under pressure for some time. That’s data point one. Data point two: Trump’s “Liberation Day” landed in the second quarter, which means more pressure on Temu in Q2.

My view? This stock will continue to show extreme volatility in both directions, driven less by fundamentals and more by whichever narrative happens to dominate the headlines that week. The smarter move might be to lean back, wait, and watch. At some point, the market will offer a price that reflects too much fear—or too much hope. When that happens, it’s time to act. Until then, let volatility do the work for you.

Just as I finished writing this article, news broke that a U.S. court has blocked most of Trump’s tariffs—so yes, the volatility isn’t going away anytime soon.

1. If you’re unsure what I mean, just compare the margin profile of JD—with its 1P, direct-sales model—to platform players like Pinduoduo or Alibaba. It’s an entirely different business model, and the margins reflect that.