AI Integration And E-commerce Expansion Will Improve User Retention And International Presence

Key Takeaways

• AI model integration and e-commerce expansion are set to boost user retention and revenue growth, enhancing marketing conversion and transaction efficiencies.
  
• Growth in the Online Marketing Services segment and successful overseas market penetration are expected to improve revenue and net margins.
  
• High video saturation, declining live streaming revenue, and rising costs in R&D and marketing present challenges to Kuaishou's user 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 integration of AI models like Kling AI 1.5 to enhance content creation, understanding, and recommendation is expected to improve user retention and marketing conversion, positively impacting revenue growth.
  
• The company's strategic focus on expanding its e-commerce ecosystem through live streaming and short video-driven commerce and its synergy with pan shelf-based e-commerce is expected to drive GMV growth, boosting revenue and possibly improving net margins by increasing transaction efficiencies.
  
• Sustained growth in the Online Marketing Services segment, driven by advancements in data infrastructure, smart placement products, and algorithms, indicates ongoing revenue expansion and margin improvement due to higher placement ROI for clients.
  
• Successful penetration in overseas markets, particularly Brazil, with a significant increase in DAUs and monetization efficiency improvements, is expected to contribute to future revenue growth, reducing overseas operating losses and improving net margins.
  
• The company's investment in the development of Local Services and potential for increased monetization efficiency suggests long-term revenue growth and competitive positioning, which may enhance overall profitability.

Kuaishou Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kuaishou Technology's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 12.5% in 3 years time.
• Analysts expect earnings to reach CN¥20.0 billion (and earnings per share of CN¥4.55) by about December 2027, up from CN¥15.0 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CN¥27.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.2x on those 2027 earnings, up from 12.3x today. This future PE is lower than the current PE for the HK Interactive Media and Services industry at 25.4x.
• Analysts expect the number of shares outstanding to grow by 0.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

Kuaishou Technology Future Earnings Per Share Growth

Risks

• Despite the growth strategies, the increasing difficulty in acquiring new users due to high short video saturation could limit future user base growth, potentially impacting future revenue expansions as user acquisition slows.
  
• The declining revenue from the Live Streaming segment, with a 3.9% year-over-year drop, indicates challenges in maintaining user engagement and monetization, which could further affect net margins if the decline continues.
  
• High competition in the e-commerce industry and ongoing consumer demand challenges could impede Kuaishou's ability to maintain growth in GMV and related commissions, potentially affecting earnings if growth slows down.
  
• Significant selling and marketing expenses driven by increased user subsidies in Online Marketing Services and e-commerce could weigh on profit margins, impacting the overall profitability of the company in the future.
  
• The ongoing need for high investment in AI large models and technology means that R&D expenses are expected to rise. This could result in increased operational costs, affecting net margins if these investments do not lead to corresponding high returns.

Valuation

• The analysts have a consensus price target of CN¥66.12 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 CN¥84.91, and the most bearish reporting a price target of just CN¥47.61.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CN¥159.8 billion, earnings will come to CN¥20.0 billion, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 7.8%.
• Given the current share price of CN¥45.6, the analyst's price target of CN¥66.12 is 31.0% 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.