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Investing.com -- Pinduoduo (NASDAQ:PDD) faces headwinds despite strong growth as the parent company of online marketplace Temu is set ramp up spending to fend off rising competition that could cloud the path for earnings growth, analysts at Macquarie said in a Tuesday note.

Macquarie downgraded Pinduoduo to neutral from outperform and cut its price target on the stock to $126 from $220.

"While domestic share gains are sustained, we believe PDD is now pushing for accelerated branding efforts to ensure ecosystem quality," Macquarie analysts said.

Pinduoduo's management suggested that they would step up investment to support high-quality merchants willing to innovate and improve quality. These merchants would also be offered significant transaction fee reductions.

The increased marketing spend could lead to higher merchant rebates and marketing expenses, potentially impacting profitability, Macquarie added as it cut its growth outlook on the company.

Macquarie cut its 2024E P/E multiple on PDD in half to 10x, aligning PDD with other domestic e-commerce peers.

Analysts at Citi also echoed similar concerns about rising competition, and flagged the conflicting message from management on the earnings call that followed Pinduoduo quarterly results. 

The Temu-parent company said the growing the number of merchants and the number of products continued to a "solid" Q2 print, but also expressed concerns about rising competition and shifting consumer demand.

"If the platform has been able to attract growing number of new merchants and number of products grew significantly and if all of the growth led to the benefit of 'solid' 2Q24 print, then why would the company suddenly note that competition is further intensifying and consumer demand has shifted?

PDD's Temu platform is facing rising competition from rivals including Alibaba Group Holdings Ltd ADR (NYSE:BABA) and JD.com Inc Adr (NASDAQ:JD) offering "competitive low-price products that might be of higher quality than similar products sold on PDD," Citi added.

The caution outlook from PDD's management overshadow Q2 results, released Monday. that beat Wall Street expectations, driven by  a Temu-led jump in transaction services revenue.  

While the shift to focus more on ecosystem quality and increased merchant support is expected to be costly endeavor, PDD's net cash balance of $39B suggest they have resources to make investments without jeopardizing its financial health.   

The increased investment cycle and potential earnings volatility may lead to more cautious valuations, Macquarie says, though PDD's strong cash position and continued market share gains in its domestic business could provide some stability.

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