Can this discount retail company beat Amazon at its own game?

It would seem like a waste if most companies bought five commercial slots during the Super Bowl and only ran the same ad five times. When Temu did this this year, it was just a reminder of that business model. The Chinese e-commerce challenger is trying to become a household name among U.S. consumers by focusing on quantity rather than quality to gain market share.

Temu has been a near-constant presence in Americans’ social media feeds and everyday web searches for over a year, promoting the cheapest options for everything from shower caddies to camera drones. This resulted in solid growth. PDD Holdings (PDD 0.34%), the parent company of Temu, has seen its stock price rise by more than 50% over the past year. For consumers focused on the lowest price market, Temu is an attractive alternative. Amazon‘S (AMZN 2.82%) E-commerce products.

Does Temu’s low-cost platform pose a threat to Amazon’s e-commerce profitability? And will it become a staple of American shopping, or will it fade away once the hype dies down? The answers to these two questions can give you a hint about the long-term investment potential of PDD stock.

Amazon has a history of Chinese challengers.

Temu is not the first Chinese e-commerce challenger to take on Amazon. But something worth noting is: Alibaba‘S (Baba -0.40%) When AliExpress launched its service in 2010, Amazon’s response was to do nothing. That’s because there’s nothing American companies can do in China to remain competitive with Chinese companies. The Chinese Communist Party continues to provide government support in the form of subsidies, tax breaks, and even outright suppression of foreign companies when they conflict with domestic companies. Ultimately, this trend led Amazon to close its e-commerce division in China in 2019 and, in some ways, admit defeat to Alibaba in China.

However, this did little to hurt Amazon at the time, as the company’s sales increased 20% in 2019. AliExpress, on the other hand, has never achieved true mainstream consumer popularity in the United States. This was partly due to the propensity of scammers, but mainly due to a lack of successful marketing. Today, AliExpress fills a niche as a popular platform for “dropshippers” who facilitate the reselling of bulk Chinese goods on Amazon for generous markups.

Image source: Getty Images.

Temu specializes in providing consumers with the cheapest possible versions of every product imaginable. This business model is not new, especially to the US customer base. American shoppers, including AliExpress, Chinese fashion retailer Shein, and domestic e-commerce company Wish, are aware of the reality that ‘you get what you pay for.’ The introduction of these platforms has all been overshadowed by Amazon’s premium services business model through Amazon Prime and well-managed e-commerce stores. So it’s unlikely that Temu will steal much revenue from Amazon, as the two companies approach online retail in fundamentally different ways.

However, Temu poses a threat to the aforementioned dropshippers because it essentially breaks the process. Instead of buying unnecessarily marked-up Chinese products on Amazon through resellers, U.S. customers can now go directly to the source through Temu. With nearly 70% of all products sold on Amazon estimated to be made in China, Temu could ultimately offer all the same products for less by overthrowing Amazon resellers.

But don’t worry too much about Amazon. The most profitable customers on Amazon e-commerce are those looking for high-quality products at competitive prices. And Amazon’s focus on Amazon Web Services and cloud computing ensures that it will maintain a positive trajectory. Looking at Temu’s website, it’s clear that they don’t currently offer inventory that would attract those shoppers.

Risks of Investing in PDD and Temu

There are currently three main threats to Temu’s longevity and relevance in the e-commerce sector. The first is the tension between the U.S. government and Chinese companies, particularly the ByteDance and TikTok platforms. With the U.S. Senate now considering a bill that would force ByteDance to sell TikTok, the U.S. is signaling a new willingness to curb Chinese companies seeking to capitalize on the U.S. market. Temu could one day become just another TikTok if U.S. regulators decide to review its data collection, tariff evasion and political connections.

The second risk lies in Temu’s unsustainable business model. Currently, it is impossible to estimate how much money Temu is making due to PDD Holdings’ ambiguous operating profit reports. But some analysts estimate the company is losing between $500 million and $1 billion a year on Temu. This may be due to Temu’s unprofitable pricing, which deliberately sets rock-bottom prices to attract customers in the short term. Additionally, the company currently lacks the warehouse infrastructure needed to expand and accelerate sales in the United States.

The third risk is an old one in the world of emerging companies: reputation. Business owners, customers, and investors all rely on a company’s reputation to determine its value, and Temu’s reputation has declined since entering the mainstream e-commerce space. A C+ rating from the Better Business Bureau and several complaints to the Federal Trade Commission regarding copyright infringement and counterfeit products make this site questionable at best.

Is PDD Holdings worth investing in?

I would definitely say no. PDD Holdings has had strong performance over the past few years, but its long-term potential is dubious at best. First of all, US investors can only purchase US Depositary Receipts linked to PDDs on the New York Stock Exchange. This means that the amount used to invest in PDDs has no correlation with public ownership. This is not a problem when investing in famous foreign companies, but it is especially risky considering the characteristics of China’s business environment. As a command economy under a communist regime, ADR in China is subject to strong government intervention if a company deviates from the party’s position.

Moreover, the company’s investor relations page and quarterly earnings reports lack in-depth information. Neither of the last two reports any information about how the company calculates its revenues and expenses or where they come from. Combined with the aforementioned institutional risks surrounding PDD Holdings, investing in this company just isn’t worth it.