One of the biggest rivals for Amazon (NASDAQ: AMZN) these days is Temu. Parent company PDD Holdings (NASDAQ: PDD) has been putting a lot of money into Temu to advertise the low-priced online retailer. Not only is Temu luring shoppers away from Amazon, but even dollar stores are experiencing challenges as consumers are looking to buy from the site in order to save as much money as they can amid high inflation.
It's a troubling situation for Amazon, to the point the company has announced plans to launch a discount store that can compete more directly against Temu and other online retailers on price. But that may not be necessary. Here's why.
Shein alleges that Temu loses money on every sale
Shein and Temu have two of the biggest Chinese e-commerce sites in the world. But that doesn't mean they're on friendly terms with one another. Privately held Shein is suing Temu over claims of copyright infringement, and it says Temu has copied Shein's product images. In its lawsuit, it also alleges something startling: Temu loses money on every single transaction.
It's an alarming claim, which, if true, suggests that Amazon may not have to fight Temu so aggressively if its business model is unsustainable; Temu may need to raise prices sooner rather than later. This is especially true if the U.S. government closes a loophole on importing low-priced products that Temu, Shein, and other foreign retail sites have been benefiting from.
So even if Amazon moves forward with its discount store, it may not be a strategy that it needs to deploy for long.
PDD Holdings stock crashes despite significant growth
For now, PDD Holdings still looks to be in fine shape, as both its revenue and profits have been rising. But that doesn't necessarily mean investors are satisfied with its performance.
Shares of PDD Holdings fell by around 30% on Monday after the company released its latest earnings. While the business is still growing at a fast rate, investors remain hesitant due to the fragility of the Chinese economy, which has been slowing. PDD Holdings co-CEO Lei Chen says that, "While encouraged by the solid progress we made in the past few quarters, we see many challenges ahead."
The parent company of Temu and Pinduoduo reported revenue of 97.1 billion yuan (US$13.6 billion) for the period ending June 30, which grew by 86% year over year. Analysts, however, were expecting sales to top 100 billion yuan. The revenue miss, combined with concerning economic conditions, resulted in a prompt sell-off of the stock.
The stock is cheaper than Amazon, but that doesn't mean PDD Holdings is a better option for growth investors
Shares of PDD are now trading at just 12 times their expected future profits (according to analysts). Amazon, by comparison, is trading at a forward price-to-earnings multiple of 38. Investors are clearly paying a significant premium for shares of Amazon. But it's arguably a much less risky investment to hold.
Amazon has a broad business that extends into artificial intelligence and the cloud, with Amazon Web Service being not only a fast-growing part of the company but also the source of the bulk of its operating income. And Amazon's e-commerce business may get a boost if Temu's products become more expensive due to tariffs and price increases to improve margins. When Temu might raise prices is questionable, but it's a risk nonetheless for PDD shareholders.
With less volatility and a more diverse and robust business overall, Amazon makes for a much better growth stock to buy and hold than PDD Holdings. And should Temu's prices rise, that could result in more shoppers turning to Amazon.
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