By Shen Lu and Tracy Qu

Shares of Temu parent PDD Holdings fell about 10% Thursday after the company missed third-quarter sales and earnings expectations, highlighting the growing challenges for the Chinese e-commerce juggernaut at home and abroad.

PDD delivered $14.2 billion in sales in the quarter, a 44% increase from the same period in 2023 but the slowest sales expansion since the second quarter of 2022. Its net profit was $3.6 billion, up 61% year over year.

The company's chairman and co-chief executive, Chen Lei, attributed the slowing growth to intensified competition and external challenges during a call with analysts Thursday.

This was the second consecutive quarter PDD missed analysts' forecasts after years of breakneck growth. In late August, the company spooked investors after missing revenue forecasts in the second quarter and a downbeat earnings call, driving down its shares nearly 29%.

Temu quickly rose to become the U.S.'s second-most popular shopping app after Amazon.com by monthly users, but its U.S. growth has shown signs of losing steam.

Investors are increasingly concerned about the potential punitive U.S. tariff impact on Temu's operations. President-elect Donald Trump promised to impose tariffs of 60% on all Chinese goods on his campaign trail. Morgan Stanley analysts said in a note on Nov. 11 that a higher-than-50% tariff increase would significantly diminish Temu's price advantage over U.S. competitors such as Amazon.

Haitong Securities on Nov. 6, after the U.S. election, downgraded PDD to neutral, considering potential geopolitical impact on Temu in the medium term.

Temu is also facing increasing competition in the low-cost goods sector. Amazon this month launched a new section to its app focused on items that cost $20 or less as the e-commerce company looks to fend off rising competition from low-cost Temu and its Chinese-founded rival Shein.

Temu has been shifting its advertising budget away from the U.S. to other regions over the past year, partly to limit geopolitical risks. U.S. legislators and regulators have directed a series of challenges at Temu and Shein as well as at Chinese-owned TikTok. While Temu is growing fast outside the U.S., its downloads have declined from the peak in July 2023, according to Morgan Stanley analysts.

After two years of operation, Temu has 49 million monthly active users in the U.S., or 74% of Amazon's U.S. user base, according to Morgan Stanley.

PDD's third-quarter earnings were 12% lower than forecasts by analysts polled by S&P Global Market Intelligence. PDD executives cautioned in August that profit would suffer as the company invested to address supply-chain inefficiencies and reduce fees for merchants. Chen said Thursday the company's third-quarter financial results were within the company's expectations.

Over the past year, executives have sought to tamp down investors' expectations for never-ending profit growth, cautioning about regulatory and compliance uncertainties in global markets where it operates.

"The previous consensus that PDD's would continue its fast growth trajectory has been broken," said Jianggan Li, founder of Momentum Works, a Singapore-based venture consultancy firm. "The company probably is seeking to manage investors' short-term expectations in a more delicate way."

In China, a series of stimulus measures Beijing introduced in September to revive the slowing economy have presented both opportunities and challenges for the company, executives said.

While the new measures were intended to fuel consumption, Co-Chief Executive Zhao Jiazhen, in a rare acknowledgment of the company's limitations, said the company's limited operational capabilities meant it missed out on opportunities to leverage the stimulus. To keep prices competitive with rivals, Zhao said PDD incurred higher costs compared with peers.

The company on Thursday continued to tout its efforts to reduce fees for merchants, an initiative introduced in August following months of protests from Temu suppliers in China against what they considered unfair penalties from the company that left some bankrupt.

The company has budgeted more than $1 billion for its fee-reduction program for the coming year. Over the past quarter, PDD executives said it has rolled out initiatives including service fee funds, lower security deposits, and an easier fund-withdrawal process.

Total costs of revenue increased 48% from the same quarter of 2023 due to increased fulfillment fees and payment processing fees.

Zhao said the company has invested heavily in compliance, aiming to remove "bad actors" and empower top performers.

J.P. Morgan analysts wrote in a Nov. 12 note that China's e-commerce market has entered a slow-growth stage where industry competition will be less cutthroat due to a slowdown in livestreaming e-commerce on short-video platforms. But they expect PDD to continue to gain market share and outperform rivals by leveraging its low-price offerings.

The bargain site is facing heightened regulatory scrutiny in Europe, including a European Commission's probe over suspicions that illegal products are sold on its platform.

Earlier this month, European authorities notified Temu of practices on its platform that infringe on EU consumer law, such as displaying misleading information.

Write to Shen Lu at shen.lu@wsj.com and Tracy Qu at tracy.qu@wsj.com

(END) Dow Jones Newswires

November 21, 2024 13:31 ET (18:31 GMT)

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