Kling AI Integration Will Unlock Creative And E-Commerce Opportunities

Key Takeaways

• AI integration is expected to drive engagement, increase content revenue, and improve advertising conversion rates on Kuaishou's platform.
  
• Long-term profitability could improve through expanded earnings from AI initiatives, despite initial impacts on margin expansion.
  
• Intense competition and uncertain AI monetization, coupled with challenges in live streaming, threaten Kuaishou's revenue growth and profitability.

Catalysts

An investment holding company, provides live streaming, online marketing, and other services in the People’s Republic of China.

• Kuaishou's focus on AI-driven content creation, particularly through Kling AI, is set to unlock massive creative potential for non-professional creators, potentially driving user engagement and increasing revenue streams from content generation tools.
  
• AI-powered tools are enhancing the recommendation systems and advertisement functionalities on the platform, which are likely to boost conversion rates and increase online marketing revenue significantly.
  
• The evolving AI-driven ecosystem is expected to lower production costs for Kuaishou’s marketing clients, potentially increasing their advertising spend and thereby positively affecting the company's net margins.
  
• The integration of AI is creating new opportunities in e-commerce with AI-generated virtual digital human live streaming, which might increase the volume of transactions and contribute to higher GMV and e-commerce revenues.
  
• Planned AI investments, while initially impacting margin expansion, are positioned to improve long-term profitability and efficient monetization across the platform, potentially driving expanded earnings in the future.

Kuaishou Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kuaishou Technology's revenue will grow by 9.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 15.5% in 3 years time.
• Analysts expect earnings to reach CN¥25.7 billion (and earnings per share of CN¥5.9) by about April 2028, up from CN¥15.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥30.0 billion in earnings, and the most bearish expecting CN¥21.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, up from 12.8x today. This future PE is lower than the current PE for the HK Interactive Media and Services industry at 14.7x.
• Analysts expect the number of shares outstanding to decline by 0.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.38%, as per the Simply Wall St company report.

Kuaishou Technology Future Earnings Per Share Growth

Risks

• The company acknowledges that upcoming AI investments over the next three years may decelerate margin expansion, potentially impacting net margins and profitability.
  
• Despite a global user outreach, the success of Kling AI’s monetization journey is still uncertain and might not meet the revenue targets expected for 2025, posing risks to anticipated revenue growth.
  
• Kuaishou faces intense competition from global technology giants in the AI and video content creation space, which could hinder their ability to attract new users and sustain revenue growth.
  
• The narrowing decline in live streaming revenue signals potential ongoing challenges in this segment, affecting overall revenue streams despite efforts to build a sustainable ecosystem.
  
• The company significantly relies on the successful integration and execution of AI to enhance monetization across its services; any failure in effective implementation could negatively impact earnings and revenue growth.

Valuation

• The analysts have a consensus price target of HK$68.623 for Kuaishou Technology based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$82.79, and the most bearish reporting a price target of just HK$51.53.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥166.1 billion, earnings will come to CN¥25.7 billion, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 8.4%.
• Given the current share price of HK$48.7, the analyst price target of HK$68.62 is 29.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.