Gains in revenue and users during its second quarter fell short of market expectations for Chinese e-commerce platform Pinduoduo, with shares prices dropping 12% by midday Friday on its topline miss and strategic focus on household essentials rather than consumer brands.

The social e-commerce platform’s Q2 revenue surged 67% year on year to RMB 12.19 billion ($1.73 billion), largely driven by ads, but missed analyst estimates of RMB 12.20 billion. 

The company added 81.4 million monthly active users (MAU) during the quarter, growing 55% year on year to 568.8 million, slower than first quarter’s 68% growth. Operating losses widened to RMB 1.64 billion ($232.1 million), a 10% increase year on year but a decrease from RMB 4.40 billion ($621.0 million) the first quarter

What investors are watching

Pinduoduo shrank its net loss attributable to shareholders to RMB 899.3 million ($127.3 million) from RMB 4.20 billion in Q1. But share prices on the Nasdaq dropped 12% to $85.77 by midday, signaling investor disappointment in its second quarter performance.

Momentum in GMV, a measure commonly used among e-commerce platforms in China to represent sales volume, fell below 100% for the first time to 79% annually from 108% in Q1, according to data compiled by Tiger Brokers. 

“Pinduoduo’s business looks like it is maturing. That will dissuade some investors, who were hoping for triple-digit GMV growth to continue,” said Michael Norris, leader of research and strategy at AgencyChina. For comparison, Alibaba’s GMV growth rate from fiscal year 2019 to 2020 was 23.2%. 

Strategic focus on users vs. rivals

Financial struggles brought on by the pandemic caused a notable consumption shift in Pinduoduo’s user base. “Users had strong demand for household necessities and agricultural products, and continued to be more cautious in discretionary spending,” Tony Ma, vice president of finance, said during the earnings call Friday. 

The company’s strategic focus during the 618 shopping holiday held in June was to meet consumers’ need for daily products rather than luxuries. 

The company will prioritize meeting user demand for necessities and farm produce through a “recommendation model” rather than focusing on brands and developing separate livestreaming services on the platform, a growth catalyst for rival Alibaba. Pinduoduo executives’s pledged to maintain its user-focused strategy and group-buying model during the Friday earnings call, disappointing investors.

“The prepared remarks focused more on everyday essentials and agricultural products, rather than branded goods,” in a shift away from what investors see as key test in its competition with rivals Alibaba and, “which I found disconcerting,” Norris said.

“In Q2 this year we observed consumers’ spending to be more value conscious,” Pinduoduo Vice President David Liu said. 

The company plans to continue investing in marketing to users through the rest of the year, as well as to drive research and innovation in agricultural technology. 

“We have demonstrated that our user-centric strategy works,” CEO Chen Lei said on the earnings call. “In particular, we started our business in agriculture, and plan to continue our strategy in agriculture.”

Pinduoduo’s user base is growing fast, and at 683 million is closing in on Alibaba’s 742 million users—though reaching the upper echelons of the e-commerce industry’s user base could represent a hard limit for the company. “This represents practically the entire online shopping population in China,” Wang Shan, an analyst at Tiger Brokers, wrote (in Chinese). “The growth rate is bound to slow down. If Pinduoduo is still a loss-making company, how will capital treat it?”

READ MORE: Tesla urges workers to defend company in Pinduoduo spat

US tech war

Additionally, an ongoing tech war between the Trump administration and Chinese firms listed in the US could lead to troubles for Pinduoduo. The White House recommended in early August that Chinese companies failing to comply with US audits would be delisted. On the earnings call, the company’s finance executive, Ma, expressed a commitment to working with US and Chinese regulators to address these concerns.

Yet regardless of the quarterly report nuances, e-commerce is growing, helped along by pandemic-driven digitization. “E commerce is generally doing well globally,” said Esme Pau, an analyst at equity firm China Tonghai Securities. “Consumers spending patterns are moving online.”