Discount shopping app Temu has racked up impressive download numbers and sales in its first 14 months in business, catching attention as a potential challenger to Amazon. Wall Street analysts are debating Temu's impact on another member of the Magnificent Seven: Meta stock.
That's because Temu's Chinese parent company PDD Holdings has spent big with Meta Platforms, blanketing Meta's Instagram and Facebook with ads for Temu. PDD's Meta offensive is notable for another reason: Shein, another e-commerce giant with roots in China, is using the same playbook.
Temu and Shein's efforts to challenge Amazon in the U.S. and other markets have been good news for Meta stock this year. Shoppers purchased more goods online this Black Friday than expected. And analysts expect e-commerce platforms to continue spending big on ads to win customers.
Amid "heightened competitive intensity, including from Asian based e-commerce companies, we see digital advertising companies especially Google and Meta disproportionally benefiting," Goldman Sachs analyst Eric Sheridan wrote in a recent client note.
There are questions, however, about how long the spending can last.
PDD Holdings Big Earnings Beat
Temu, which lists a Boston headquarters, is owned by e-commerce giant PDD Holdings. PDD also operates the China-focused e-commerce platform Pinduoduo. On Nov. 28, the company reported sales of $9.7 billion in its September-ended quarter, up 94% year over year. Earnings jumped 35% to $1.64 per share.
PDD does not break out sales or costs for Temu separately. But Goldman Sachs analysts estimated in October that Temu is generating more than $1 billion in monthly gross merchandise value. The analysts expected that number to grow in the second-half of 2023.
Temu sells discounted goods directly from manufacturers in China to customers in more than 40 countries. It has caught on quickly. Temu through September is the most downloaded app this year in the U.S., France, the U.K., Germany and Australia, according to research firm Data.ai.
Advertising has been key to that growth. Shein and Temu are "almost single-handedly having an impact on the cost of advertising, particularly in some paid channels in Google and in Meta," Etsy Chief Executive Josh Silverman said on the company's earnings call Nov. 1.
A Coresight Research poll published in September found that about 68.5% of U.S. consumers were familiar with Temu, compared to 48% in February. About half of those polled learned about Temu through social media. And 42% found the company through online advertising, Coresight found.
"If you open Facebook, Instagram, TikTok — you'll see a lot of Temu coupons, discounts, sales, promotions," Sunny Zheng, a senior research analyst with Coresight Research, told Investor's Business Daily. "They use a lot of strategies on social media platforms."
Meta Stock: Strong Spending From China
Temu is pushing its digital advertising strategy at a critical time for Meta. The company's digital advertising business is bouncing back this year, with Meta's stock surging. Meta's ad sales from "online commerce and gaming benefited from strong spend among advertisers in China reaching customers in other markets," Chief Financial Officer Susan Li said on the company's Oct. 25 earnings call.
Overall, Meta's revenue climbed 23% year over year to $34.1 billion. Nearly all Meta sales come from advertising.
Meta officials didn't mention Temu or any other company in its report. But analysts say Temu's ad push is clearly giving Meta a lift. In a client note published before Meta's third-quarter earnings, Goldman Sachs analysts estimated Temu alone will spend about $1.2 billion on the platform this year.
Advertising industry analyst Brian Wieser, who publishes Madison and Wall, estimated that China "represents a large share" of Meta's total revenue. "It's certainly under 10% of total revenue but very likely more than a few billion," he wrote. "I would estimate the country accounts for around $10 billion in annual revenue at the present time."
Morgan Stanley analyst Brian Nowak also framed Temu spending as a "nice extra tailwind" for broader ad growth.
Cautious View Of Ad Spend Growth
However, that spending has been eyed with some caution.
China-based e-commerce companies "selling outside of their domestic market is not new," Stifel analyst Mark Kelley told clients in a recent note. But "the rapid growth seen by Temu, Shein, and others has brought attention to the impact the space is having on the digital advertising market, and potential headwinds once these marketers start to cut back (which they inevitably will, in our view)."
Temu and Shein also have each attracted questions about the sources and quality of their goods. Meta also must grapple with a serious hurdle: Facebook is banned in China. However, Chinese companies can use it to advertise to customers elsewhere. Meta's regulatory filings typically cite the risk of Chinese government action "that reduces or eliminates our China-based advertising revenue."
Li, Meta's CFO, also noted that Meta's ad business growth has been broad, even excluding China advertisers. Analysts, including Stifel's Kelley, generally take the view that a slowdown in spending from Chinese e-commerce firms would provide only a limited headwind for Meta.
"Some see the China retail exposure as a risk," Evercore ISI analyst Mark Mahaney told clients in a note. "We don't. We see it as proof of reward. If you want to successfully build a global direct-to-consumer brand from scratch, spend on Meta."
Meta Stock Teams Up With Amazon
Besides, Meta can play both sides of the e-commerce battle. Through a new advertising partnership with Amazon, Facebook and Instagram users will be able to purchase goods from Amazon by clicking on promotions in their social feeds.
Some Amazon stock analysts view the deal as a response to the rise of social-powered shopping networks in TikTok, Temu and Shein. For Meta, the agreement offers a closer connection with one of its major advertisers. The financial details of the arrangement have not been shared, however.
"We expect that the impact for Meta will likely be limited in the short term, but the deal could help with concerns on comping high Chinese advertising spend in 2024," BofA Global Research analyst Justin Post said in a note.
Holiday Competition
Meanwhile, there is little to indicate that PDD Holdings is pulling back. Total operating expenses for the company climbed 44% in local currency to $3.5 billion in the third quarter. PDD said the total reflected an increase in sales and marketing expenses. Co-CEO Lei Chen said Temu is "still in its early stage" on PDD's earnings call.
Further, Temu is returning to the Super Bowl with a commercial early next year, the Wall Street Journal reported.
Separately, rival Shein has reportedly filed confidentially for an initial public offering. And TikTok's American e-commerce platform launched in September.
All are competing with Amazon to capture the $221.8 billion that Adobe Analytics expects Americans alone will spend shopping online for the holiday season.
And that likely means more ad spending. Wieser, the Madison and Wall analyst, recently bumped up his projection for U.S. ad spending growth this year to 5.9% from 5%. He wrote that the increase factors in "significant cross-border spending (primarily from manufacturers based in China) and a growing reliance on e-commerce in general, which produces companies who are much more advertising-intense than traditional retailers and manufacturers."
Meta stock has gained 176% this year while Amazon is up 74%. And, following its big earnings report, PDD stock has gained 73% this year.
