Temu's Tariff Troubles Could Throttle Meta's Growth

PDD, one of the largest e-commerce companies in China, launched Temu as its cross-border marketplace in 2022. It undercut many big retailers by allowing Chinese merchants to directly sell their goods to overseas buyers.

By the end of 2024, Temu had grown to 292 million monthly active users (MAUs) worldwide. As of last August, 185.6 million of those MAUs were in the United States. It also became the world's most downloaded shopping app on iOS and Android in 2024.

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However, Temu's growth spurt could end as the Trump administration raises its tariffs on Chinese goods and scuttles the "de minimis" rule that previously exempted shipments valued at less than $800 from customs duties. Under the new rules, imports from China will face tariffs up to 245% while products worth less than $800 would be taxed at either 30% of their declared value or $25 per item. That figure will be raised to $50 per item after June 1. That's certainly bad news for PDD, which had counted on Temu to diversify its business away from China and help it challenge Amazon and other e-commerce leaders.

But it could also spell trouble for Meta Platforms (NASDAQ: META), which profited from Temu's ad-spending spree over the past few years. That's why Meta's investors should pay close attention to Temu's recent decision to rein in its ad purchases across Meta's Facebook and Instagram, Alphabet's Google, and other American ad platforms.

Why did Meta profit from Temu's growth?

2022 was a year to forget for Meta. Its revenue and EPS declined 1% and 38%, respectively, as Apple's privacy changes on iOS, intense competition from ByteDance's TikTok, and the macro headwinds throttled its ad sales. As its top line growth cooled off, its Reality Labs segment, which makes its AR and VR products, continued to rack up steep losses.

That combination of slowing growth and rising costs caused Meta's stock to plummet to a seven-year low of $88 a share in November 2022. However, Meta's stock subsequently rallied more than 460% and trades at around $495 today. From 2022 to 2024, its revenue and earnings per share grew at a compound annual growth rate of 19% and 67%, respectively, even as inflation, rising interest rates, geopolitical conflicts, and trade wars rattled the global markets.

Three catalysts sparked that recovery. First, Meta gathered more first-party data to curb its dependence on Apple's third-party data for its targeted ads. Second, it countered TikTok by expanding its short video platform, Reels, on Facebook and Instagram. Lastly, China's economic slowdown and hostile regulatory environment drove a lot of its e-commerce and gaming companies to ramp up their spending on Facebook and Instagram to reach more overseas users. One of those companies was Temu.

How much could Temu's troubles affect Meta?

In 2023, Meta's revenue in China surged 85% to $13.7 billion and accounted for 10% of its top line. Starting in the second quarter of 2024, its ad sales in China gradually slowed down as it lapped its initial growth spurt in 2023.

Nevertheless, Meta's revenue from China still rose 34% to $18.4 billion in 2024 and accounted for 11% of its top line. By comparison, its U.S. revenue rose 20% to $59.7 billion, its total Asia-Pacific revenue, including China, increased 24% to $45.0 billion, its European revenue grew 23% to $38.4 billion, and its Rest of World revenue increased 22% to $17.9 billion.

Therefore, China is actually Meta's fastest-growing market -- even though Facebook, Instagram, WhatsApp, and Messenger are still officially banned in the country. All of that growth is coming from Chinese companies that are ramping up their ad purchases to reach more overseas customers.

Meta doesn't disclose how much of that revenue comes from individual advertisers like Temu. However, Morgan Stanley estimates that Temu spent about $1.4 billion, or 1% of Meta's total revenue, on Facebook and Instagram ads in 2024. Losing 1% of its ad revenue might not seem like a big deal for Meta, but Temu was just one of the many Chinese cross-border marketplaces that had been ramping up its purchases of Facebook and Instagram ads over the past two years. Two other Chinese e-commerce companies that probably bought a lot of Meta's ads include Alibaba's AliExpress and Shein.

Don't assume Meta is safe from the trade war

Meta might initially seem less exposed to rising tariffs and the trade war than other companies because it generates most of its revenue from ads instead of physical products. However, it's still highly dependent on Chinese advertisers like Temu -- and that growth engine could abruptly shut down if the U.S. and China don't turn down the temperature with some trade negotiations.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon, Apple, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, and Meta Platforms. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.