PDD Holdings Inc. (NASDAQ: PDD)

PDD Holdings' Q1 2025 financial performance demonstrated the company's commitment to long-term ecosystem development at the expense of near-term profitability. Total revenues grew 10% year-over-year to RMB95.7 billion ($13.2 billion), with both major revenue segments contributing to growth despite challenging market conditions.

The revenue growth was driven by a 15% increase in online marketing services and others to RMB48.7 billion, and a 6% increase in transaction services to RMB47.0 billion. This growth occurred despite what management characterized as "rapid changes in the external environment" and reflects the platform's continued ability to attract merchants and facilitate transactions.

However, profitability metrics showed significant pressure as the company invested heavily in merchant and consumer support. Operating profit declined 38% to RMB16.1 billion, while non-GAAP operating profit decreased 36% to RMB18.3 billion. The decline was primarily driven by a 43% increase in sales and marketing expenses to RMB33.4 billion, reflecting increased promotional and advertising activities.

Net income attributable to ordinary shareholders fell 47% to RMB14.7 billion, with diluted earnings per ADS declining from RMB18.96 to RMB9.94. On a non-GAAP basis, net income decreased 45% to RMB16.9 billion, with non-GAAP diluted earnings per ADS falling from RMB20.72 to RMB11.41.

Despite the profit pressures, the company maintained strong cash generation with operating cash flow of RMB15.5 billion, though down 26% from the prior year. The company's financial position remained robust with cash, cash equivalents, and short-term investments totaling RMB364.5 billion ($50.2 billion) as of March 31, 2025.

Online Marketing Services and Others showed strong growth of 15% year-over-year to RMB48.7 billion, representing 50.9% of total revenues. This segment includes advertising fees from merchants who promote their products on the platform, as well as other value-added services. The robust growth reflects increased merchant participation and advertising spending, despite economic uncertainties.

The growth in online marketing services demonstrates the platform's effectiveness as an advertising channel for merchants. Even as consumer spending patterns may be shifting, merchants continue to invest in platform advertising to capture market share and drive sales, indicating the strategic importance of PDD's ecosystem to their business models.

Transaction Services grew at a more moderate pace of 6% year-over-year to RMB47.0 billion, accounting for 49.1% of total revenues. This segment primarily includes commissions and fees from transactions facilitated on the platform. The slower growth rate suggests that while transaction volumes continue to expand, the pace has moderated compared to the rapid growth seen in previous periods.

The relatively balanced contribution from both revenue segments (approximately 51%-49% split) demonstrates PDD's diversified revenue model. The company benefits from both transaction-based fees and advertising revenue, providing multiple monetization streams from its platform ecosystem.

Cost of revenues increased 25% to RMB40.9 billion, primarily due to increased fulfillment fees and payment processing fees. This increase was driven by higher transaction volumes and the company's continued investment in logistics and payment infrastructure to support merchant and consumer needs.

PDD Holdings' Q1 2025 operating expense profile reflected a strategic shift toward increased ecosystem investment, with total operating expenses rising 37% to RMB38.6 billion. This increase was primarily driven by the company's decision to substantially increase support for merchants amid challenging external conditions.

Sales and Marketing Investments

Sales and marketing expenses showed the most significant increase, rising 43% year-over-year to RMB33.4 billion. This RMB10.0 billion increase represented the largest component of the overall expense growth and reflected management's strategic decision to increase promotional and advertising activities.

According to management commentary, these increased marketing investments were specifically designed to "support merchants and consumers amid rapid changes in the external environment" and to help drive sales and reduce costs for a broader base of SME (small and medium enterprise) merchants.

Research and Development

R&D expenses increased 23% to RMB3.6 billion, reflecting continued investment in platform technology, AI capabilities, and infrastructure improvements. These investments support the company's long-term competitive positioning and operational efficiency initiatives.

General and Administrative

General and administrative expenses decreased 9% to RMB1.7 billion, demonstrating the company's focus on operational efficiency even while increasing merchant-focused investments. This decline shows management's ability to control corporate overhead while scaling investment in growth areas.

Strategic Rationale

Management emphasized that these investments, while weighing on short-term profitability, are designed to strengthen the long-term health of the platform. Co-CEO Lei Chen noted that the investments "gave merchants the room to adapt and focus on high-quality, sustainable growth," while Co-CEO Jiazhen Zhao highlighted the importance of building "a healthy merchant ecosystem that can deliver satisfactory shopping experiences for consumers."

PDD Holdings' Q1 2025 results reflected a deliberate strategic pivot toward ecosystem strengthening through increased merchant and consumer support. This approach represents a significant shift from previous quarters' focus on profit optimization to one emphasizing sustainable long-term growth.

Merchant Ecosystem Support

The company's enhanced merchant support strategy focuses on several key areas:

• Cost Reduction Initiatives: Helping merchants reduce operational costs through platform efficiencies and shared services
• Sales Support Programs: Increased promotional activities and marketing support to help merchants drive revenue growth
• SME Focus: Particular emphasis on supporting small and medium enterprises that form the backbone of the platform's merchant base
• Adaptive Solutions: Providing merchants with tools and resources to adapt to changing market conditions

Consumer Value Proposition

The increased investment in consumer-facing initiatives aims to maintain platform attractiveness through:

• Enhanced promotional activities and discount programs
• Improved user experience and platform functionality
• Strengthened logistics and fulfillment capabilities
• Expanded product selection and merchant diversity

Long-term Strategic Vision

Management's commentary suggests this investment phase is designed to:

• Build resilience against external economic uncertainties
• Strengthen competitive moats through merchant and consumer loyalty
• Position for accelerated growth when market conditions improve
• Maintain market share leadership in key categories and regions

VP of Finance Jun Liu indicated that "financial results may continue to reflect the impact of sustained investments in the ecosystem" as the company supports stakeholders through uncertain times, suggesting this strategic approach will persist in coming quarters.

PDD Holdings maintained an exceptionally strong financial position in Q1 2025, providing significant strategic flexibility to execute its ecosystem investment strategy while maintaining financial stability:

Liquidity and Cash Position

• Cash and cash equivalents: RMB70.1 billion ($9.7 billion), up from RMB57.8 billion at December 31, 2024
• Short-term investments: RMB294.4 billion ($40.6 billion), increased from RMB273.8 billion
• Total liquid assets: RMB364.5 billion ($50.2 billion), representing significant growth from RMB331.6 billion
• Other non-current assets: RMB76.2 billion, including time deposits and debt securities

Asset Quality and Composition

Total assets increased to RMB530.5 billion from RMB505.0 billion at year-end 2024, reflecting both organic growth and strategic cash deployment. The company's asset base consists primarily of highly liquid financial instruments, providing maximum flexibility for strategic initiatives.

Liability Structure

Total liabilities increased modestly to RMB200.8 billion, with the primary components being:

• Payable to merchants: RMB92.5 billion, reflecting the platform's role as an intermediary
• Accrued expenses and other liabilities: RMB76.2 billion
• Merchant deposits: RMB16.6 billion, representing security deposits from platform participants

Shareholders' Equity

Shareholders' equity grew to RMB329.7 billion ($45.4 billion) from RMB313.3 billion, driven by retained earnings growth despite the profit decline. The company maintains a debt-to-equity ratio near zero, providing maximum financial flexibility.

This robust balance sheet enables PDD Holdings to pursue its ecosystem investment strategy without financial constraints, while also providing a buffer against potential economic uncertainties. The substantial cash position also creates opportunities for strategic acquisitions, technology investments, or expanded international operations as conditions warrant.

PDD Holdings' management provided important context for investors regarding the company's strategic direction and expectations for future performance, emphasizing the prioritization of long-term ecosystem health over short-term financial metrics.

Growth Rate Expectations

Management explicitly communicated that "a slowdown in growth rate is expected as our business scales and challenges emerge", with this trend being "further accelerated by the changes in the external environment in the first quarter." This guidance sets realistic expectations for investors regarding the company's revenue trajectory.

Investment Phase Duration

The company indicated that financial results may continue to reflect sustained ecosystem investments as it supports merchants and consumers through uncertain times. This suggests the current investment phase is not a one-quarter phenomenon but rather a sustained strategic approach that may persist for multiple quarters.

Market Environment Assessment

Management's references to "growing uncertainties" and "rapid changes in the external environment" suggest the company is navigating a challenging macroeconomic landscape that requires adaptive strategies and potentially defensive positioning.

Strategic Priorities Going Forward

• Ecosystem Resilience: Building a merchant and consumer ecosystem that can withstand economic volatility
• Market Share Defense: Maintaining competitive positioning through increased investment during uncertain times
• Quality Growth: Focusing on sustainable, high-quality growth rather than pure volume expansion
• Operational Efficiency: Balancing increased ecosystem investments with operational discipline

Financial Flexibility

The company's substantial cash position of over RMB364 billion provides significant strategic flexibility to maintain current investment levels while adapting to changing market conditions. This financial strength allows PDD to make counter-cyclical investments when competitors may be constrained.

Investors should expect continued volatility in profitability metrics as the company executes this strategy, with the success ultimately measured by long-term market position, ecosystem health, and sustainable growth rather than quarterly profit maximization.