Amazon Has A Cocky New Rival. It Should Take The Threat Seriously.

Temu burst onto the American shopping scene with a 2023 Super Bowl ad promising ultralow prices that let users “shop like a billionaire” on its website. It fired off another round of pricey ads at this year’s Super Bowl, doubling down on the marketing blitz. Now some Amazon stock watchers are debating the unthinkable: Whether the young platform out of China might pose a serious threat to Amazon.com’s (AMZN) e-commerce empire.

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Founded in September 2022, Temu has already emerged as an e-commerce juggernaut. The Temu shopping site is drawing a following with head-turning discounts and big ad spending that have sent its app downloads skyrocketing.

The rise of Temu vs. Amazon and others has come at the same time Chinese e-commerce firms Shein and TikTok Shop quickly scaled up in the U.S. But Temu, which is owned by giant e-commerce stock PDD Holdings (PDD), has grown so fast that Amazon stock analysts and e-commerce experts are pondering its potential as a serious competitor. (Read more about PDD stock and action in other China stocks here.)

“Temu is a threat to Amazon at certain price points, certain categories and for certain people,” Juozas Kaziukenas, founder and chief executive of e-commerce intelligence firm Marketplace Pulse, told Investor’s Business Daily. “We don’t yet know how big that is.”

What Is Temu?

Temu, which lists a Boston headquarters, is taking PDD’s playbook for e-commerce in China and applying it globally. It’s one of the drivers of PDD stock. Founded in 2015, PDD operates the shopping platform Pinduoduo in China. Pinduoduo offers deep discounts and takes what analysts call a gamified approach to shopping. The app features games that let users win further discounts and encourage frequent check-ins.

The approach helped Pinduoduo win market share from two well-known China stocks: Alibaba Group (BABA) and JD.com (JD), which are China’s dominant e-commerce players.

For 2023, PDD recorded net income of $8.3 billion while its sales jumped 90% year-over-year to $35 billion. PDD, which moved its headquarters from China to Ireland last year, is expected to report first-quarter earnings later this month.

With Temu, PDD has taken a similar gamified and discount-focused approach. The Temu shopping site connects consumers around the world with products made in China and shipped directly. On the Temu app, brightly colored stickers for “lightning deals” pop up left and right. Prices can be jaw-dropping: a $7 handheld vacuum, $8 wireless earbuds and a $40 bedroom dresser.

Advertising Blitz Drives Temu Shopping

Boosted by big advertising spending, the Temu shopping app racked up 123 million downloads in the U.S. last year, the most for any app, according to market intelligence firm Sensor Tower. Globally, the app was downloaded 319 million times in 2023.

Seema Shah, Sensor Tower’s vice president of research and insights, says the growth came as consumers were watching their spending.

“That could initially be what makes people download the app and give it a look,” Shah told IBD. “(For Temu), you have prices under a dollar on certain things. That probably makes it difficult for some others without the ability to price like that.”

PDD does not disclose separate results for Temu. But Goldman Sachs analysts estimate Temu’s global gross merchandise value — the total of all goods sold — reached $18 billion in 2023 and could grow to $45 billion this year.

Temu did not respond to requests for comment for this article.

Why Is Temu So Cheap?

Temu’s aggressive U.S. push appears to be part of a broader international offensive.

In the first quarter, monthly active users of the Temu app globally were up 614% year-over-year, to 167 million, according to Sensor Tower data. In the U.S., monthly active users were up 134% at 50.4 million, the data show.

Shipping directly from China to customers in other countries means delivery can take longer, compared with Amazon and other companies with local logistics operations. The Temu shopping site says shipping can take six to 22 days.

On the other hand, “Temu launched in 50 countries in a year, which wouldn’t be physically possible if you had to build warehouses and store products locally,” Kaziukenas of Marketplace Pulse told IBD.

Beyond Amazon Stock: Who Is Threatened By Temu?

It’s not just a story of Temu vs. Amazon. With its international push, Temu is bumping up against a range of e-commerce players. They include Shopee parent company Sea Ltd. (SE) in Southeast Asia and MercadoLibre (MELI), the “Amazon of Latin America.“

On May 7, Coupang (CPNG) told analysts that it needs to continue investing heavily to separate itself from challengers out of China for the South Korean market.

In the U.S., a March Earnest Analytics report found that stores such as Ollie’s Bargain Outlet (OLLI), Five Below (FIVE) and Dollar Tree (DLTR) more often had customers who had also shopped on Temu, compared with Amazon.

In February, Etsy (ETSY) blamed cautious consumer spending for a recent dip in sales. The marketplace, focused on handcrafted goods, saw its gross merchandise sales decline 1% to $13.2 billion in 2023.

“It’s very clear that the people gaining share are Amazon, Walmart (WMT), Temu and Shein,” Etsy Chief Executive Josh Silverman told analysts on the company’s February earnings call. “And almost everyone else is losing share.”

Last fall, Silverman told analysts that Temu and Shein were “almost single-handedly” affecting the price of online advertising.

Temu Vs. Amazon: The Price Factor

Amazon Chief Executive Andy Jassy’s recent comments on consumer behavior underline Temu’s opportunity. Last month, Jassy told analysts that customers “remain cautious, trading down on price when they can and seeking out deals.”

Targeting price-conscious consumers has been Temu’s strength, highlighted by the 2023 Super Bowl commercial boasting about its low prices.

Roughly half of all shoppers who have used Temu in the past year said discounts were the top motivation, according to a recent YouGov poll.

Amazon Stock Powered By Prices, Fast Shipping

Amazon’s strength is its ability to offer generally low prices with rapid shipping. The company has spent tens of billions of dollars over nearly three decades to offer a huge range of products delivered in a couple days or quicker.

So far this year, nearly 60% of Amazon Prime member orders have arrived the same or next day across the 60 largest U.S. metro areas, the company said in late April. Jassy told analysts last month that quicker delivery times drive more frequent sales.

“Amazon has been training consumers for two decades that the thing we really should value is fast delivery,” Kaziukenas told IBD.

The Temu shopping site focuses on consumers who are willing to wait a bit longer to receive their items in exchange for a deep discount. Still, the company is taking steps to speed delivery of some orders. That includes opening its marketplace to some U.S. and European sellers.

Temu Vs. Amazon: Does Size Matter?

Not surprisingly, Temu has caught Amazon’s attention.  Temu and Shein have replaced Walmart and Target (TGT) as Amazon’s “central competitive focus,” the Wall Street Journal reported in late March.

To be sure, Temu is still nowhere near the scale of Amazon.

Last year, the Seattle-based tech behemoth was responsible for 38% of e-commerce purchases in the U.S., according to recent estimates from analysts at Morgan Stanley. Walmart was a distant second with 6%, and eBay (EBAY) was third with 3.2%. Temu represented just 0.7% of U.S. e-commerce purchases.

But that marked impressive growth for a company that launched in September 2022.

U.S. e-commerce “has large incumbents continually investing in the consumer experience” which is why “disruption at scale has been difficult,” the Morgan Stanley note said. “Temu has demonstrated there are exceptions to that rule.”

PDD Stock: Temu Shopping’s Challenges

PDD stock climbed 79% in 2023. The company has said its global business is “at a relatively early stage.”

Despite its growth, Temu faces serious challenges in the U.S. Growth of the Temu shopping app shows signs of easing this year. The Temu app was downloaded 20.8 million times in the first three months of 2024, according to Sensor Tower estimates. That compares with a peak of 35.8 million U.S. downloads in the second quarter of 2023.

Globally, “Temu has remained on 30-35 million new downloads a month since mid-2023, and the next move looks more likely to be down rather than up,” Bernstein Research analyst Robin Zhu told clients in a May 7 note.

Temu appears to be finding success retaining customers in other countries. The platform “now has more MAUs (monthly active users) than Amazon in 13 out of its top 15 markets,” Zhu wrote. There are two exceptions: Japan and the U.S.

Amazon Stock Rival Faces Government Scrutiny

As U.S. tensions with China brew, Temu is also grappling with heightened government scrutiny.

Trade disputes between the U.S. and China have created more pressure on Chinese tech companies, highlighted by a recently approved bill that will ban TikTok unless Beijing-based ByteDance sells the social network.

A bipartisan group of lawmakers are backing a bill that would change an aspect of U.S. trade policy known as the de minimis exemption. The exception allows parcels valued under $800 to enter the U.S. duty-free, as long as they are addressed to an individual person.

De minimis shipments have soared in recent years as Temu, Shein and TikTok Shop increasingly send products straight from China to American doorsteps. That has helped the companies keep prices down, experts say.

Further, The Information reported in March that several U.S. lawmakers were pushing for an outright ban on imports from Temu, citing a lack of compliance with U.S. laws barring goods made using forced labor. A Temu spokesperson told the BBC late last year that anyone doing business with it must “comply with all regulatory standards and compliance requirements.”

PDD has acknowledged that U.S. scrutiny poses serious risks to the company. In an April 24 filing with the U.S. Securities and Exchange Commission, PDD said its operations could be “materially and adversely affected” if current tariff exemptions “were to become unavailable.”

Is Temu Shopping A ‘Nothing Burger?’

There is plenty of skepticism about Temu’s ability to sustain its popularity. Before Temu, platforms like Wish garnered hype before fading.

“In retail, the arc of stories is that there’s some darling that people hear about with rumors of great success, and everyone thinks it is the next big thing,” Sucharita Kodali, retail principal analyst at Forrester, told IBD. “But 99 out of 100 times, it ends up being a nothing burger.”

It’s also unclear if Temu can sustain its heavy spending on marketing. Analysts believe the company spent as much as $3 billion last year on U.S. advertising alone. It was the top overall spender last year on Meta Platforms‘ (META) Facebook and Instagram, according to the Wall Street Journal.

The spending has built awareness, however. A Morning Consult poll in March found that 86% of U.S. adults were aware of Temu. Further, 40% of adults said they have made a purchase with Temu.

But Goldman Sachs analysts estimate Temu lost $6 per order last year after marketing, shipping and other costs. The company has disputed the estimates to media outlets, without providing details.

“It’s actually not that shocking when you spend that much money on advertising, that they have that many downloads,” Kodali of Forrester said. “That’s what advertising is intended to do: get you traffic. What we don’t know is how big they really are from a revenue standpoint.”

Amazon Stock: Lowering Seller Fees

Amazon stock slumped briefly in the fall, but the stock has cruised since then as earnings and revenue have only grown stronger.

In Amazon’s first-quarter results published April 30, the company said its North American retail sales grew a better-than-expected 12% to $86 billion. And Amazon’s $15.3 billion in overall operating income was its second-best quarterly total ever.

Amazon stock notched modest gains following the report and is generally still a popular pick on Wall Street. Shares are up 25% this year and about 79% over the past 12 months.

Technical Analysis Of Amazon Stock

On a technical basis, Amazon stock broke out Nov. 14 from a cuplike base, which had a buy point of 145.86, according to MarketSurge. It is far extended from the 5% buy range. The stock hit an all-time high of 191.70 in intraday trading Thursday and also notched a record close. Investors should wait for a new base to form, which could present another buying opportunity.

Amazon may be adjusting to match its new challengers. Late last year, Amazon cut some of its fees for third-party sellers. The move was widely seen as a response to stepped-up competition for sellers from Shein and Temu. China-based sellers represent nearly half of the top sellers on Amazon’s marketplace in the U.S., according to Marketplace Pulse research.

Amazon, already a leading advertiser by spending, has also launched new social media initiatives. The retail giant in the past 12 months has launched deals to display Amazon third-party ads on Pinterest, as well as to allow direct purchases from Amazon ads on Meta’s Facebook and Instagram, as well as Snapchat, the Snap (SNAP) unit.

What’s Next For PDD Stock?

While Amazon stock has gained ground, PDD stock — which trades as American depositary receipts in the U.S. — is off to a wobbly start to 2024. The stock lost 18% in the first three months of 2024.

For PDD, Temu was “the main share price driver in 2023 due to its rapid growth in the U.S.,” CFRA Research analyst Jian Xiong Lim told IBD. CFRA remains positive on PDD stock but “restrictive trade measures will be a key risk that investors should be aware of.”

PDD stock has picked up some momentum of late, though it is still down about 6% since the start of the year. Shares rate out well by IBD metrics overall. PDD has a best-possible 99 IBD Composite Rating and an Accumulation/Distribution Rating of B, indicating institutions have done more buying than selling of shares over the past 13 weeks.

Technical Analysis Of PDD Stock

On a technical basis, PDD stock currently is forming a cup base with a buy point of 148.30, which would cap the 5% buy range at 155.71. The stock closed near 136 on Thursday.

Analysts are largely bullish ahead of PDD’s first-quarter report. Nearly all of the 47 analysts following PDD rate it a buy, according to FactSet. For the Q1 report, analysts project PDD sales will rise 95% to $10.4 billion, FactSet data show. Earnings are seen rising 46% to $1.43 per share.

Zhu of Bernstein Research noted, however, that discussions with international investors have focused on “geopolitical headline risk as much as strong business performance,” as he wrote to clients.

Temu Vs. Amazon: The Long View

Zhu wrote that concerns about Temu shopping taking share from U.S. e-commerce players has “quieted down over the past few months,” though it “is certainly not behind us.” Bernstein views Amazon as best-positioned to defend its share among U.S. e-commerce players.

Rob Sanderson, an analyst with Loop Capital, told IBD that Amazon investors remain concerned about competition from Temu and Shein, but the concern is less than it was a year ago.

“Amazon has continued to grow alongside (the) large ramp of Chinese players,” Sanderson said. In a recent client note, Sanderson rated Amazon stock a buy with a price target of 225.

Kaziukenas, of Marketplace Pulse, noted that PDD’s backing gives Temu runway to continue its challenge for market share.

“They can think in terms of decades,” Kaziukenas told IBD. “Not years.”

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