First Year-Over-Year Margin Expansion of the Cycle, a 40% EPS Miss Split Roughly Evenly Above and Below the Operating Line, and RMB 100 Billion Committed to a First-Party Brand Business With No Metrics

Results vs. Consensus

PDD gives no guidance, so the only bar is the Street's. Sources cluster tightly on the revenue estimate and span a wider band on earnings, so both are shown as ranges rather than a single vendor figure. All actuals below come from the income statement in the earnings release, not from figures quoted verbally on the call.

Q1 2026 Scorecard

Year-over-Year Income Statement

Sequential Trajectory

The quarter-over-quarter comparison flatters nobody, because Q1 is structurally PDD's weakest quarter and Q4 its strongest. The point of the table is the seasonal reference in the last column: the Q4-to-Q1 step-down this year is close to last year's, so the sequential collapse is calendar, not deterioration.

Five-Quarter Trend

Revenue

Revenue of RMB 106.2B grew 11%, roughly 3% short of the Street. The composition matters more than the level. Transaction services, the line that carries Temu and the platform's fulfilment-linked take, grew 19.9% to RMB 56.3B and is now 53% of the group. It has gone from +1% in Q2 2025 at the trough of the de minimis shock to +20% here, which is the cleanest evidence yet that the local-fulfilment rebuild worked.

Online marketing services and others, the domestic advertising engine, grew 2.5% to RMB 49.9B. That is the slowest growth this line has printed in the five quarters we track, and the fourth consecutive quarter of deceleration from +15%. Management has consistently framed this as a deliberate trade, with the RMB 100B merchant-support programme cutting fees and rebating costs back to sellers. The framing is plausible and has been consistent for a year. It is also now the majority of the revenue base growing at roughly the rate of Chinese nominal GDP, and PDD has never disclosed a take-rate series that would let anyone separate voluntary fee reduction from lost share.

Assessment: The revenue miss is not the story. The mix shift is. PDD is trading a high-margin advertising line growing at 2% for a lower-margin transaction line growing at 20%, and the resulting gross-margin compression is exactly what showed up this quarter.

Margins

Two margin stories run in opposite directions. Gross margin fell 134bp to 55.9% as costs of revenues grew 14.5% against revenue growth of 11.0%, driven by fulfilment fees, bandwidth and server costs, and payment processing. That is the arithmetic consequence of transaction services outgrowing advertising by 17 points.

Operating margin went the other way, and this is the number we have been waiting five quarters for. Non-GAAP operating margin reached 19.9% against 19.1% a year ago, an expansion of 77bp and the first year-over-year operating margin expansion since the investment cycle began. The trajectory of the year-over-year change reads -1,400bp, -940bp, -200bp, -100bp, then +77bp. On a GAAP basis the expansion is wider at 161bp, though the whole 84bp gap between the two is a 30% reduction in share-based compensation rather than operating performance.

The source of the expansion is entirely sales and marketing. S&M grew 1.1% against revenue growth of 11.0% and fell to 31.8% of revenue from 34.9%, a 312bp release. On the company's non-GAAP basis the Financial Director put it at 31% versus 34%. That is the subsidy phase of the RMB 100B programme rolling off. Research and development, meanwhile, grew 23.5% and is the fastest-growing line on the income statement, which is what a genuine rotation from customer acquisition to capability building looks like.

Assessment: The operating margin inflection is real, it is the single most important number in the print, and the market ignored it entirely. But note the composition risk: margin expanded because S&M was cut, while gross margin deteriorated. If the S&M release is a one-time reset rather than a new run rate, and gross margin keeps eroding on mix, the operating margin gain is borrowed rather than earned.

Earnings

Non-GAAP EPS per ADS of RMB 9.51 fell 16.7% against RMB 11.41 and missed a Street bar near RMB 16 by roughly 40%. GAAP diluted EPS per ADS fell 14.7% to RMB 8.48. The bar deserves a word: the Street was modelling a return to something near Q4's 24% non-GAAP operating margin plus a positive below-the-line contribution of the kind Q1 2025 delivered. Both legs broke, and the bar was arguably too high on the first leg given Q1 seasonality. That does not excuse the second leg.

The effective tax rate rose 137bp to 24.6%. That is a modest headwind and, unlike last quarter, not the driver. The driver is the RMB 6.1B swing on interest, investment and other income, and the disclosure around it is a single line in a table.

Assessment: This is the second consecutive quarter in which PDD grew operating profit and shrank earnings per share, and the third in the last four. At the Q4 report we named the Q1 print as the explicit test of whether the Q3 2025 earnings inflection was durable. It was not. We are not going to characterise a second consecutive RMB-billions swing on an unexplained line as noise; two data points make a pattern, and the pattern is that PDD's reported earnings are no longer a reliable read on the operating business.

Segment Performance

PDD reports two revenue lines and no segment profitability, no GMV, no order counts, no user metrics and no geographic split. That disclosure floor has not moved in years and it is the single largest obstacle to underwriting the name. What follows is what the two lines will support.

Transaction Services

Transaction services grew 19.9% to RMB 56.3B and reached 53.0% of group revenue, a second consecutive quarter above half after Q4 2025's 51.6%. The line bundles Temu's fulfilment-linked economics with domestic transaction take and the grocery business, so it cannot be read as a clean Temu proxy, but Temu is the swing factor and the recovery arc is unmistakable: +6% at the point of impact, +1% at the trough, then +10%, +19% and +20%. Two years ago this was a hypergrowth line; it is now a high-teens line, which is the post-tariff steady state we assumed at the Q3 2025 upgrade.

The strategic framing on the call put supply chain, not marketing, at the centre of the global business.

"After nearly 3 years of growth, our global business have received support from many consumers worldwide. As the business grows, management team has also been reflecting on how to create more sustainable and differentiated value for consumers in a highly competitive global market. We believe the key is to return to the roots of e-commerce, which is supply chain capabilities." — Lei Chen, Co-Chairman and Co-CEO

Assessment: This is the best quarter transaction services has printed since the de minimis shock, and it is almost certainly the last clean one. The EU's flat EUR 3 duty on consignments below EUR 150 takes effect on July 1, five weeks after this call. The burden of a flat per-parcel fee falls hardest on the lowest-value baskets, which is precisely the segment Temu's model is built on. Q1's +20% tells us the platform can rebuild after a tariff shock. It tells us nothing about the next one.

Online Marketing Services and Others

The advertising line grew 2.5% to RMB 49.9B, decelerating for a fourth consecutive quarter. This is where the RMB 100B merchant-support programme lands: fee reductions, shipping-cost rebates, and logistics subsidies all reduce what the platform takes from the same gross transaction volume. Management's position, unchanged for four quarters, is that this is the price of ecosystem health, and the questioning on this call accepted that framing without pressing for a take-rate disclosure.

"And to your second question, the online retail market continues to hold great potential, and there is much more that we can do. However, at the same time, the industry has entered a critical phase of high-quality development, the only way to realize sustainable and healthy industry growth is to take the necessary initiatives to deeply empower the supply chain." — Jiazhen Zhao, Co-Chairman and Co-CEO

Assessment: At +2.5%, this line is no longer decelerating toward a floor; it is at one. Without take-rate or GMV disclosure there is no way to distinguish a platform voluntarily giving back margin from a platform losing share to instant retail and content commerce. Management gets the benefit of the doubt for one more quarter because the fee reductions are documented and the operating margin expanded anyway. A negative print here would end that.

Cost Structure

With no segment profitability disclosed, the expense lines are the only window into where money is going, and this quarter they moved decisively.

Assessment: The 312bp release from sales and marketing is more than three times the reinvestment into research and development, and it is the whole of the operating margin expansion. The rotation is real and it is what management said would happen. The 134bp of gross-margin give-back is the cost of the mix that produced the revenue growth, and it will keep coming as long as transaction services outgrows advertising.

Cash and the Balance Sheet

Assessment: The headline is that cash and short-term investments resumed growing after Q4's stagnation, up RMB 13.8B to RMB 436.1B. The footnote is that other non-current assets, which the company describes as time deposits and debt securities, fell RMB 9.5B over the same period, so the combined investable balance rose only RMB 4.2B on RMB 16.4B of operating cash flow. Some of the headline cash growth is a maturity shift, not new money. The absence of an inventory line is the other thing worth noting: as of March 31 the first-party brand business had consumed a RMB 15B capital injection into a subsidiary and had not yet put a single unit of goods on the group balance sheet.

Grading the Commitments From the Q4 Call

Six things were flagged as the tests for this print at the Q4 report. Five of the six resolved.

Key Topics & Management Commentary

Overall Management Tone: Management arrived with a single message and delivered it without deviation: supply chain investment is the strategy, quarterly financial outcomes are a distraction, and the company is in the middle of an organisational reset it describes in unusually blunt terms. The posture was more assertive than Q4's, which had hedged with "this will inevitably bring more challenges." Where Q4 warned about pressure on profitability, Q1 simply declined to discuss profitability as a topic. The gap between that confidence and a 40% earnings miss went unaddressed for the entire hour, and the absence of any comment on the below-the-line swing was the single most conspicuous feature of the call.

1. The First-Party Brand Business: RMB 15 Billion In, RMB 100 Billion Committed

The defining disclosure of the quarter. In March, PDD incorporated a dedicated company to run a first-party brand business, funded it with an initial RMB 15B cash injection, and stated a plan to invest RMB 100B over the next few years. For context, RMB 100B is roughly 23% of the company's current cash and short-term investments and about the size of a full year of net income. It was announced with the release rather than as a standalone filing, and it is the first strategic move under the three-year "build another Pinduoduo" framework introduced at the December 2025 shareholders' meeting.

"As we head into the next decade of our journey, supply chain investments will be our core strategic priority." "We will commit significant resources to building the first-party brand business, unlocking new opportunities for our supply chain partners, and driving exceptional value for our customers." — Jiazhen Zhao, Co-Chairman and Co-CEO

What was not disclosed: which product categories, whether revenue will be recognised gross or net, what inventory policy applies, what gross margin is targeted, when the business is expected to contribute, what headcount it carries, or what milestone would tell an outside investor whether it is working. The March 31 balance sheet carries no inventory line, so as of the print the RMB 15B sits inside a subsidiary and nothing has reached the consolidated statements.

Assessment: This is a change in what PDD is, not an extension of what it does. A marketplace that takes a fee on other people's goods and a brand owner that buys, holds and sells its own are different businesses with different balance sheets, different working capital, different margin structures and different failure modes. The strategic logic is coherent and the funding is affordable. The disclosure is not adequate to the size of the commitment, and until there is a metric attached, this is a RMB 100B call option that shareholders cannot value.

2. What "Certainty of Sales Volume" Means for the Balance Sheet

The clearest description of the model came in response to a question about where the money goes. PDD intends to guarantee offtake to manufacturers so they will invest in product development, and to absorb the demand risk that today sits with the seller.

"Under our first party brand model, we provide certainty of sales volume to the supply chain and empowering the manufacturers to confidently invest in R&D and process innovation and significantly cutting down the cost and risks that are inherent in the innovation and brand building." — Jiazhen Zhao, Co-Chairman and Co-CEO

Management was explicit that the risk transfer is deliberate, describing the platform as taking on more risk while sharing rewards with manufacturers. The phrase to hold onto is "certainty of sales volume." In practice that is either a purchase commitment or a guaranteed-margin arrangement, and both put inventory or an equivalent obligation on PDD's side of the ledger.

Assessment: PDD's balance sheet is currently the cleanest in Chinese e-commerce: RMB 436.1B of cash and short-term investments, essentially no debt, no inventory, and RMB 109.2B of merchant payables that function as negative working capital. Taking demand risk on branded goods erodes every one of those characteristics. The strategy may still be right. But investors who own PDD for the fortress balance sheet should understand that management has just announced its intention to spend up to a quarter of the fortress on a business that consumes working capital by design.

3. The Below-the-Line Hole Management Did Not Address

Interest and investment income, net moved from a RMB 223M gain to a RMB 632M loss. Other income, net moved from a RMB 3,261M gain to a RMB 2,031M loss. Combined, a RMB 6,147M adverse pre-tax swing against a pre-tax profit of RMB 16,758M. Neither line was discussed in the prepared remarks, neither was itemised in the release, and neither was raised by any of the three analysts who asked questions.

"We are investing resolutely in our supply chain capabilities." "These investments are the cornerstone of a resilient and thriving platform ecosystem, and we are prepared to invest over the long term." — Jun Liu, VP of Finance

That is the entirety of the finance function's commentary in the release. It says nothing about the lines that cost shareholders RMB 6.1B of pre-tax profit. PDD carries RMB 313.0B of short-term investments and RMB 95.2B of time deposits and debt securities, so a mark-to-market loss on a portfolio that size is unremarkable in itself. What is remarkable is that a company holding roughly half its market value in financial assets does not tell shareholders what happened to them in a quarter when they lost money.

Assessment: Last quarter the earnings decline was tax. This quarter it is investment and other income. In both cases the answer arrived only through inference, and in both cases the operating business was fine. Two consecutive quarters is where an investor stops calling this noise and starts calling it a disclosure problem. It is the reason our conviction falls this quarter even though the rating does not.

4. Operating Margin Inflects for the First Time in the Cycle

Non-GAAP operating margin reached 19.9% against 19.1% a year ago. That 77bp is small in isolation and large in sequence, because it is the first positive number in a series that ran -1,400bp, -940bp, -200bp and -100bp over the preceding four quarters. The mechanism is entirely sales and marketing discipline.

"On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue this quarter was 31% versus 34% for the same quarter last year." — Li Zhang, Financial Director

In absolute terms sales and marketing grew 1.1% while revenue grew 11.0%. That is what the end of a subsidy phase looks like on an income statement. General and administrative expense fell outright.

Assessment: The thesis we upgraded on at Q3 2025 said margin would stop declining and then recover. It has now done both, a quarter or two ahead of what we modelled. This is the pillar that held, and it is why the rating holds with it.

5. Gross Margin Is the Price of the Revenue Mix

Costs of revenues grew 14.5% against revenue growth of 11.0%, taking gross margin down 134bp to 55.9%. The release attributes the increase to fulfilment fees, bandwidth and server costs, and payment processing. Those are transaction-linked costs, and transaction services grew 17 percentage points faster than advertising, so the compression is a direct consequence of the mix that produced the growth.

The interaction matters for how durable the operating margin gain is. Roughly 134bp came out of gross margin and 42bp went into research and development, against 312bp released from sales and marketing and 25bp from general and administrative, netting to the 161bp of GAAP operating margin expansion. The gross-margin drag is structural and will persist as long as the mix keeps shifting. The sales and marketing release is a level reset that can only happen once.

Assessment: Do not extrapolate 312bp of annual sales and marketing leverage. The right way to model PDD from here is a gross margin that keeps drifting down on mix, a sales and marketing ratio that stabilises near 32%, and an operating margin that therefore expands far more slowly than this quarter implies. The first-party brand business, when it lands, pushes gross margin down further and puts cost of goods on the income statement for the first time.

6. Research and Development Becomes the Growth Line

Research and development grew 23.5% to RMB 4.4B and is now 4.2% of revenue against 3.7%. On the company's non-GAAP basis the growth is faster still.

"Our research and development expenses were RMB 4 billion this quarter on a non-GAAP basis, up 32% year-over-year." — Li Zhang, Financial Director

For a company that has historically run one of the leanest research and development lines among large platforms, a 32% non-GAAP increase against 1% growth in sales and marketing is a genuine reallocation. It is consistent with the stated strategy: money moving out of buying transactions and into building capability.

Assessment: This is the most credible evidence on the call that the supply chain rhetoric has a budget behind it. It is also the cheapest part of the commitment. RMB 0.8B of incremental research and development is a rounding error against RMB 100B of announced first-party investment.

7. Transaction Services at +20%, and the July 1 Duty Nobody Raised

Transaction services grew 19.9%, the fastest of the recovery and the third consecutive quarter of acceleration off the +1% trough. Management framed the global business around supply chain integration and brand building rather than user growth, and gave no user, order or geographic metrics.

"Branded products only getting started on our global platform with consumer demand still underserved in different markets. This creates significant potential in launching branded products in various product categories." — Lei Chen, Co-Chairman and Co-CEO

The European Union's removal of the EUR 150 customs-duty exemption was agreed by member states in November 2025 and given final legislative approval in February 2026. From July 1, 2026 a flat EUR 3 duty applies to every consignment valued at or below EUR 150, alongside a new requirement to file standardised electronic shipment data before goods enter the bloc. The change was fully legislated five weeks before this call. It appears nowhere in the release, nowhere in the prepared remarks, and in none of the six analyst questions.

Assessment: A flat per-parcel duty is regressive with respect to basket size, so it falls hardest on exactly the low-value cross-border flow Temu is built around, and the electronic filing requirement adds compliance cost per shipment on top. PDD absorbed the US de minimis change in roughly three quarters by shifting to local fulfilment, so the playbook exists. The concern is not that management lacks a plan. It is that a known, dated, quantified regulatory change five weeks away did not merit a sentence.

8. Rural Logistics: The First Hard Numbers in a Year

The free-shipping-to-villages programme, expanded across more than ten provinces during Q4, was given actual operating metrics for the first time.

"we have expanded the direct to village coverage to over 70% of local villages by March. The daily order volume at these transfer warehouses have approached 10,000 orders." — Jiazhen Zhao, Co-Chairman and Co-CEO

Management also described upgrading village pickup points into multi-function hubs that handle both inbound parcels and outbound distribution of local agricultural produce, and cited a reduction of up to 80% in logistics cost for shipping to some remote regions. The figures are county-level and illustrative rather than aggregate, so they establish that the programme is operating, not how large it is.

Assessment: Two years of qualitative rural-logistics narrative finally acquired a number, which is progress. But 10,000 daily orders at a county's transfer warehouses is a case study, and the company still discloses no aggregate volume, no cost, and no return. This remains a moat argument that has to be taken on faith.

9. Governance, Compliance and the "Complete Reinvention"

The organisational language on this call was harder than anything in the Q4 report. Management described the year as one of complete reinvention, said the company had taken decisive steps to rectify its operations, and put compliance ahead of growth in the ordering of priorities.

"Following my appointment as Chairman, this is also a critical year for the complete reinvention of our corporate organization and culture" — Jiazhen Zhao, Co-Chairman and Co-CEO

"The whole team is required to treat safety, compliance and social responsibility as the absolute request for everything we do and maintain a clear focus on high-quality development." — Jiazhen Zhao, Co-Chairman and Co-CEO

Concretely, more than 20 food-safety initiatives were introduced in the quarter, covering business-qualification review, food advertising controls, live-stream monitoring and a dedicated food database. General and administrative expense fell 4.8% while this was happening, so the compliance build is being absorbed within the existing cost base rather than added to it.

Assessment: Companies that describe their own culture as needing complete reinvention are usually responding to something. Q4 acknowledged high-profile regulatory inquiries in key markets; Q1 escalated the language and added specifics on food safety, which is the domestic exposure rather than the cross-border one. This is a rational response to a real risk, and it belongs in the bear column until the underlying matters are closed out.

10. The Long-Term Framing Hardens Into a Refusal to Discuss Quarters

Across the prepared remarks and both margin-related answers, management's position was that quarterly outcomes should not be evaluated at all.

"As communicated in the past, our priority is long-term value creation through sustained investments in the ecosystem and the supply chain rather than short-term results." — Jiazhen Zhao, Co-Chairman and Co-CEO

At Q4 the equivalent language was a warning that investment would pressure profitability in the short term, which at least framed an expectation. Here the framing is that the question is not a legitimate one. Combined with no guidance, no segment profitability, no take rate, no user metrics and no explanation of the below-the-line result, the effect is that PDD is asking to be underwritten on strategy alone.

Assessment: This works while operating profit compounds and cash builds. Both are true today. It stops working the moment operating profit turns, because there will be no disclosure left to tell shareholders whether the investment is working. The RMB 100B first-party commitment sharply raises the cost of that opacity.

11. Finance Leadership: Three Quarters Without the VP of Finance on the Call

The financial review was delivered by the Financial Director for a third consecutive quarter. The VP of Finance is quoted in the release, as she was in the Q4 release while on medical leave, so the quote does not establish a return to duty. Continuity of the underlying reporting has been maintained across the change, and the numbers reconcile against the release without exception.

Assessment: Not a thesis issue on its own. It becomes one in combination: three quarters of substitute presentation, two quarters of unexplained below-the-line results, and a new business line with no financial disclosure framework. Each is tolerable; the set is the reason we are asking for answers rather than assuming them.

Guidance & Outlook

PDD has never issued revenue, margin or earnings guidance and did not start here. There is no outlook table to build because there is no outlook. What the company did provide is a single forward number of a different kind.

What the Street has to work with. With no guide, consensus is built from the run rate and the seasonal shape. Q1 is structurally PDD's weakest quarter and Q4 its strongest; the Q4-to-Q1 revenue step-down was 14.3% this year against 13.5% last year. Holding the current 11% year-over-year growth rate would put FY2026 revenue near RMB 480B. The variables that will move it are the transaction-services line after July 1 and whether the advertising line stabilises above zero.

The implied earnings path. The operating side is now the easier half to model: non-GAAP operating margin expanding modestly year over year off a 19.9% Q1 base, with gross-margin drift offsetting most of the remaining sales and marketing leverage. The hard half is below the line. Two consecutive quarters of adverse swings on unexplained items make the RMB 3-4B of annual below-the-line income the Street had been carrying an unsafe assumption. Strip it out entirely and FY2026 non-GAAP EPS per ADS lands in the RMB 63-70 range, which is US$9.1-10.1 at the quarter-end rate. That is a decline against FY2025's RMB 72.38 even with operating profit growing.

Guidance style. PDD's disclosure has moved from minimal to actively resistant. Management this quarter did not merely decline to guide; it argued that quarterly evaluation is the wrong lens. Investors should price the resulting uncertainty rather than assume it away, which is one reason the multiple has compressed to where it now sits.

Analyst Q&A Highlights

Three analysts asked six questions in a call that ran well under an hour. Not one asked about the earnings decline, the below-the-line items, the tax rate, capital return, or the EU duty taking effect in five weeks. The narrowness of the questioning is itself a data point about how much of the sell-side has stopped underwriting the earnings line.

Why a First-Party Brand Business, and Why Now

The opening question went straight to the strategic logic of a marketplace launching its own brands, and asked whether this should be read as a change in what the company is. The answer connected the move to the organisational reset rather than to a commercial opportunity, framing it as a platform obligation to fix a supply chain that cannot upgrade itself.

Q: "First is that the company has been positioned as the e-commerce platform. And then we saw the company launched the new first-party brand initiative last quarter. So could management elaborate on the key considerations behind at this current moment?"
— Alicia Yap, Citigroup

A: "As a platform, we have both the responsibility and capability to deepen our investment in the supply chain and bring our own solutions to the challenges that is faced by the industry. The formation of the dedicated company aims to consolidate platform resources to advance the new first-party brand business model by taking a deeper and more active role in product development and standard setting."
— Jiazhen Zhao, Co-Chairman and Co-CEO

Assessment: The answer is a philosophy, not a business case. "Responsibility and capability" is not a return on capital, and "product development and standard setting" does not tell an investor what gets sold, at what margin, or when. The question was the right one and it was answered at the level of intent.

Where the RMB 100 Billion Goes and When It Reaches the P&L

The most concrete question of the call asked for an allocation of the announced investment and a timeline for when it shows up in reported financials. Management described the capability set brand building requires and the risk-transfer mechanism, and did not answer the timing half at all.

Q: "So my question is in which areas do the company plan to allocate these investments? When can we expect this to begin to reflect in the company's financials?"
— Ronald Keung, Goldman Sachs

A: "Under our first party brand model, we provide certainty of sales volume to the supply chain and empowering the manufacturers to confidently invest in R&D and process innovation and significantly cutting down the cost and risks that are inherent in the innovation and brand building."
— Jiazhen Zhao, Co-Chairman and Co-CEO

Assessment: The "when" was asked directly and skipped entirely. That matters more than the "where," because the answer determines whether FY2026 carries a cost line with no matching revenue. On the evidence of this exchange, investors should assume the first-party business is a cost centre through at least the current year and model it as such.

Advertising Deceleration Against a Solid Consumption Backdrop

A recurring theme in the questioning was the gap between reported Chinese consumption trends and PDD's own advertising growth. The framing was pointed: national data showed solid first-quarter consumption and rising online penetration, yet the platform's marketing-services line slowed again. Management responded with the industry-transition argument rather than with anything about share or take rate.

Q: "So in that backdrop, we see the online marketing service growth rate slowed in the first quarter for PDD."
— Ronald Keung, Goldman Sachs

A: "And to your second question, the online retail market continues to hold great potential, and there is much more that we can do. However, at the same time, the industry has entered a critical phase of high-quality development, the only way to realize sustainable and healthy industry growth is to take the necessary initiatives to deeply empower the supply chain."
— Jiazhen Zhao, Co-Chairman and Co-CEO

Assessment: This was the exchange that mattered most and it produced the least. A 2.5% growth rate on 47% of revenue, against a consumption backdrop the questioner described as solid, is either deliberate fee forgiveness or share loss. Management chose not to distinguish, and without a take-rate disclosure nobody outside the company can.

Live-Stream and Quick Commerce: Will PDD Enter?

The competitive question asked whether the platform intends to follow rivals into the two formats absorbing the most capital in Chinese e-commerce. The answer was a clear no by implication: management routed the entire competitive discussion back to supply chain capability and named the first-party brand business as the response.

Q: "First, we have seen the continuous emergence of new e-commerce models in e-commerce industry, including live stream e-commerce and quick commerce. How does the company assess the impact of these new models on the broader industry landscape. And are there any plans of the companies to expand into these areas."
— Joyce Ju, Bank of America

A: "As we mentioned earlier, competition among the different economic platforms or business models ultimately works down to competition in the underlying supply chain capabilities."
— Jiazhen Zhao, Co-Chairman and Co-CEO

Assessment: A refusal to chase instant retail is defensible and consistent with a company that has never subsidised its way into an adjacent format it did not invent. It is also the second consecutive quarter of watching competitors spend heavily in a category PDD has ceded. If the domestic advertising line goes negative, this answer will be re-read as complacency rather than discipline.

Sales and Marketing Ratio and the Steady-State Margin

The only question about profitability in the entire call asked where margins settle. It was answered by the finance function with a statement of philosophy and no number, no range, and no timeframe.

Q: "Second, is in the first quarter, we saw a slight increase in sales and marketing expense ratio of the company alongside a fluctuation in overall profit margin. How should we back margin trends going forward?"
— Joyce Ju, Bank of America

A: "As we have regularly communicated in the past, our objective is the long-term sustainable growth of the platform's intrinsic value." … "The long-term value of the platform is fundamentally tied to the value we create for consumers and the broader ecosystem."
— Li Zhang, Financial Director

Assessment: The premise of the question is worth noting: the sales and marketing ratio rose sequentially from the Q4 level even as it fell 312bp year over year, which is normal Q1 seasonality on a smaller revenue base. The answer engaged with neither the sequential nor the annual comparison. A company that has just posted its first year-over-year operating margin expansion in five quarters had an easy, favourable answer available and declined to give it.

The Global Business After Three Years

The second half of the opening exchange asked where the international business goes next and how it retains the users it has won. The response reframed the question away from users and toward supply chain, and set out a two-part plan of end-to-end integration plus first-party brand development. Notably, no user, order or market-level figure was offered in reply.

A: "After nearly 3 years of growth, our global business have received support from many consumers worldwide. As the business grows, management team has also been reflecting on how to create more sustainable and differentiated value for consumers in a highly competitive global market. We believe the key is to return to the roots of e-commerce, which is supply chain capabilities."
— Lei Chen, Co-Chairman and Co-CEO

Assessment: A response-only artifact, because the answer is where the information is. Three years in, the global business is described exclusively in terms of what the platform will build, never in terms of how many people use it or what it earns. That is a deliberate choice, and it is why transaction-services growth is the only observable that the July 1 duty can be measured against.

What They're NOT Saying

1. What is inside "interest and investment income, net" and "other income, net": a combined RMB 6.1B adverse pre-tax swing, roughly 37% of pre-tax profit, disclosed as two numbers in a table with no itemisation, no commentary in the prepared remarks, and no question from the floor. This is the largest single unexplained item in the print.
2. Whether the below-the-line loss recurs: no indication of whether the driver is a mark-to-market on a portfolio that reprices every quarter, an impairment, a one-time settlement, or something structural. Without that, forecasting earnings from operating profit is guesswork.
3. Anything at all about the EU low-value-consignment duty: legislated in February, effective July 1, applying a flat EUR 3 to every parcel under EUR 150, plus mandatory pre-arrival electronic filing. Five weeks from the call, zero mentions, on a quarter where the affected revenue line grew 20%.
4. When the first-party brand business reaches the income statement: asked directly, not answered. No category list, no gross-versus-net revenue treatment, no inventory policy, no target margin, no breakeven timing, no interim milestone.
5. How the RMB 100B will be phased: "over the next few years" is the entire schedule. RMB 15B is in. Whether the remaining RMB 85B is a hard commitment, a ceiling, or an aspiration is undefined.
6. Take rate or GMV: still not disclosed, in the fourth consecutive quarter of advertising deceleration. This is the one disclosure that would settle whether the RMB 100B support programme is voluntary fee forgiveness or a response to competitive share loss.
7. Any Temu operating metric: no gross merchandise value, no order volume, no user count, no geographic split, no contribution margin, three years after launch and with the line now above half of group revenue.
8. Capital return: not mentioned, in a quarter where cash and short-term investments reached RMB 436.1B, or roughly half of market value, and where the company chose instead to commit up to RMB 100B to a new operating business.
9. The effective tax rate outlook: the rate has now moved from roughly 16% in Q4 2024 to 26% in Q4 2025 to 24.6% here, with no explanation of the driver or the steady-state level in any of those quarters.
10. What "complete reinvention" is responding to: management describes rectifying operations, strengthening compliance awareness and reinventing corporate culture. It does not say what prompted it, and the Q4 reference to high-profile regulatory inquiries in key markets was not updated.
11. Return-to-role timing for the VP of Finance: a third consecutive quarter with the financial review delivered by the Financial Director and no comment on the arrangement.

Market Reaction

• Pre-print setup: shares closed at $96.64 on May 26, entering the print down 14.8% year to date, down 6.2% over the trailing twelve months and down 1.9% over the trailing thirty days. The 52-week closing range going in was $94.52 to $138.13, so the stock was already sitting about two dollars above its 52-week closing low.
• Reaction session (May 27, before-the-open print): opened at $88.69, a gap of -8.2%, and traded a range of $83.61 to $88.69. It never traded above the open.
• Close: $86.61, down 10.4% or $10.03 on the session. That is a new 52-week closing low, roughly 8% below the prior one.
• Volume: 40.4M ADS against a 30-day average of 6.9M, or 5.9 times normal.
• Benchmark: the S&P 500 was flat on the session, so effectively all of the move is company-specific.

The tape traded the earnings line and nothing else. A 22% increase in operating profit and the first year-over-year operating margin expansion in five quarters produced a gap down of 8% at the open and a further 2% of selling into the close, on six times normal volume, with the index unchanged. There is no ambiguity about what was being sold.

Two things made the reaction worse than the fundamentals warrant. The first is the shape of the miss: a roughly 40% shortfall against the earnings bar is an order of magnitude that suggests something broken, and the release gave no information that would let a reader distinguish an investment mark from an operating collapse in the hours between the print and the open. Silence in a release is priced as bad news. The second is that the RMB 100B first-party commitment landed in the same document. A large, open-ended capital commitment from a company that has just missed earnings by 40% reads as a use of cash rather than a strategy, particularly to holders whose primary support for the stock is the balance sheet.

The setup amplified it. Shares came in about two dollars above the 52-week closing low with the run-in already discounting a weak quarter, so there was no cushion of positioning left to absorb a surprise of this size. The break of the low then did what breaks of lows do to a stock with no guidance and no catalyst calendar.

Street Perspective

Debate: Is the Below-the-Line Drag Noise or Signal?

Bull view: the operating business is compounding. Revenue grew 11%, operating profit grew 22%, operating margin expanded year over year for the first time in the cycle, and operating cash flow returned to growth. Interest, investment and other income are portfolio outcomes on RMB 400B-plus of financial assets and will mean-revert; marking a portfolio down does not change what the platform earns from commerce.

Bear view: two consecutive quarters of earnings falling while operating profit rises is not a portfolio accident, it is a pattern, and the company's refusal to itemise either quarter is the actual problem. If below-the-line items can swing RMB 6B in a quarter with no explanation, then reported earnings are not a usable input and the multiple has to widen to compensate.

Our take: the bear has the better of this now, which is a change from last quarter. We were willing to call Q4's tax step noise; we are not willing to call two quarters of RMB-billions swings on undisclosed lines noise. The operating case remains intact and is the reason the rating holds. But the correct response to opacity is to demand a wider discount, and that is exactly what the stock is now applying.

Debate: Does the RMB 100 Billion First-Party Pivot Create or Destroy Value?

Bull view: PDD has spent a decade building the deepest relationships with China's small manufacturers of any platform, and the constraint on those manufacturers is branding, not production. Owning the brand captures the margin that currently leaks to third-party sellers, deepens the moat, and gives the global business differentiated inventory instead of the same commodity goods every marketplace carries. RMB 100B is affordable against RMB 436B of cash.

Bear view: this converts an asset-light, negative-working-capital marketplace into an inventory business, which is a strictly worse business model with a worse return on capital, and PDD has never run one. Every disclosure that would let an investor judge progress has been withheld. The company is asking for RMB 100B of trust in the same quarter it declined to explain a RMB 6B earnings hole.

Our take: the strategic logic is sound and the risk is real, and the two are not in conflict. Our concern is not the model, it is the accountability structure around it. A RMB 100B programme with no disclosed metric cannot be graded, which means it cannot be stopped by shareholders if it is not working. We would treat the absence of a first-party disclosure framework by the FY2026 report as a governance failure rather than a timing choice.

Debate: At Four Times Ex-Cash Earnings, Is the Balance Sheet a Floor or a Trap?

Bull view: at $86.61 the market values PDD at roughly $128B against US$63.2B of cash and short-term investments and a further US$13.8B of time deposits and debt securities. Strip the first and the operating business trades near 4.3 times trailing non-GAAP earnings; strip both and it is near 3.4 times. The company generated RMB 16.4B of operating cash flow in its weakest quarter. This is a valuation that assumes the business is impaired, and the operating lines say it is not.

Bear view: cash you cannot get is not worth its face value. There is no dividend, no buyback and no stated intention to start either. The company has instead announced its intention to spend up to RMB 100B of it on an unproven business. A cheap multiple on a balance sheet controlled by management that will not commit to returning any of it is a value trap, and the stock has fallen roughly 16% since the last report while looking equally cheap the whole way down.

Our take: the bear is right that the cash is not a floor, and we should say plainly that we made this argument at $103 and the stock is at $87. What has changed since then is that the cash is now being allocated, which converts an idle asset into a testable decision. That cuts both ways. The valuation support is real, it is simply not a floor, and anyone underwriting PDD here is underwriting the first-party brand programme whether they intend to or not.

Model Update Needed

Valuation impact. At the $86.61 close, the revised base case of $110 to $130 implies 27% to 50% upside, the bull case of $145 to $170 implies 67% to 96%, and the bear case of $78 to $92 spans -10% to +6%. The prior framework was anchored to an earnings path that assumed positive below-the-line income and a return to Q4-level margin; both assumptions are now removed. The band is wide because the two variables that drive it, the below-the-line result and the post-duty trajectory of transaction services, are both undisclosed and both resolve within two quarters.

Thesis Scorecard Post-Earnings

Graded against the standing thesis as last argued in the Q4 2025 report. The pillar numbering is carried forward unchanged so the quarter-over-quarter movement is visible.

Overall: the thesis is weakened but not broken, and it has split cleanly in two. The operating half strengthened: margin inflected positive, transaction services accelerated, operating cash flow returned to growth, cash resumed building. The reported-earnings half broke: the EPS inflection pillar we upgraded on at Q3 2025 has now failed twice and is retired, and a new bear point on disclosure quality is added in its place. The RMB 100B first-party commitment sits across both halves, plausible as strategy and unaccountable as an investment.

Action: Maintaining Outperform with reduced conviction. Existing holders: hold. New positions: we would build gradually into the $78 to $92 band rather than commit at once, on the view that 4.3 times ex-cash earnings with operating profit compounding 22% is a price that pays you to wait through two quarters of poor visibility. We were wrong to call this at roughly $103 in March, and we are not going to compound that error by capitulating at the low; but the burden of proof has shifted to management. The next three prints resolve it. What would force a downgrade: a second consecutive unexplained below-the-line loss of this magnitude in Q2, transaction-services growth falling below high single digits once the EU duty is in the numbers, or a full year passing with no financial disclosure framework around the first-party programme. What would restore conviction: an itemisation of the below-the-line lines, a take rate or GMV disclosure, or the initiation of a capital-return programme alongside the first-party spend rather than instead of it.