Secular Digital Trends And AI Growth Will Shape New Markets

Key Takeaways

• Accelerating AI adoption and deep integration with partners are driving rapid growth in high-margin cloud revenues, with AI becoming central to the business model.
  
• Strategic expansion in specialized government and enterprise verticals, plus industry consolidation, is strengthening pricing power, recurring contracts, and long-term profitability.
  
• Heightened supply chain risks, customer concentration, and regulatory challenges threaten Kingsoft Cloud's margins, revenue growth, and long-term competitiveness in an intensifying cloud market.

Catalysts

Provides cloud services to businesses and organizations primarily in China.

• While analyst consensus expects Kingsoft Cloud's partnership with Xiaomi and Kingsoft Ecosystem to provide significant revenue over the next three years, the current pace and depth of integration-with Xiaomi's AI models being trained directly on Kingsoft Cloud clusters and ecosystem revenues already reaching 25 percent of total revenue-signal the potential for even faster and larger-than-anticipated top-line growth, especially as AI adoption within Xiaomi and its subsidiaries accelerates.
  
• Analysts broadly agree that surging AI revenues are a driver of future growth, but with AI now constituting 39 percent of public cloud revenue and seeing over 200 percent year-over-year growth, Kingsoft Cloud's entrenched leadership in next-generation public cloud AI infrastructure could see AI surpassing 60 percent of total revenue within the next two years, driving structurally higher net margins as legacy cloud business mix shrinks in relative importance.
  
• The company's flexible capital deployment and rapid scaling of high-performance computing clusters-leveraging diversified financing, leasing agreements, and government-backed New Infrastructure initiatives-will allow for exponential infrastructure growth at low incremental cash cost, dramatically improving operating leverage and EBITDA margins well ahead of peers.
  
• With an early lead in government, healthcare, and public service cloud verticals, and a proven ability to deliver integrated AI and cloud solutions (such as AI-powered office automation for government clients), Kingsoft Cloud is poised to capture high-value, recurring contracts as digital transformation and cybersecurity standards tighten nationwide, steadily improving profitability through high-margin verticals.
  
• Continued industry consolidation in the Chinese cloud market, combined with increasing enterprise adoption of hybrid and multi-cloud solutions, strongly position Kingsoft Cloud to gain pricing power, win outsized market share, and lock in long-term, visible revenue streams, setting up structural upside to both revenue growth and sustained gross margin expansion.

Kingsoft Cloud Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Kingsoft Cloud Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Kingsoft Cloud Holdings's revenue will grow by 24.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -24.1% today to 3.9% in 3 years time.
• The bullish analysts expect earnings to reach CN¥587.8 million (and earnings per share of CN¥0.69) by about August 2028, up from CN¥-1.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 122.4x on those 2028 earnings, up from -14.7x today. This future PE is greater than the current PE for the US IT industry at 27.7x.
• Analysts expect the number of shares outstanding to grow by 3.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.65%, as per the Simply Wall St company report.

Kingsoft Cloud Holdings Future Earnings Per Share Growth

Risks

• Heightened geopolitical tensions and ongoing US-China tech decoupling have already required Kingsoft Cloud to source more Made-in-China computing resources in place of foreign chips, which may create long-term supply chain uncertainties, increased costs, and limit their ability to provide cutting-edge cloud and AI services, all of which could adversely impact revenue growth and profit margins.
  
• The company's profitability remains under strain, as it continues to post an adjusted operating loss-RMB 55.8 million in the most recent quarter-even as revenues grow, raising concerns that persistent difficulty achieving positive operating margins could erode cash reserves and threaten long-term earnings and viability.
  
• Kingsoft Cloud is highly dependent on a small number of key customers, notably Xiaomi and the Kingsoft Ecosystem, which contribute 25 percent of total revenue, so any loss or reduced demand from these concentrated accounts could sharply impact overall revenue and future earnings.
  
• Industry pressures, including intensifying price competition and commoditization in China's cloud market, are negatively affecting gross margins, with the company specifically citing margin declines due to front-loaded investments and profit sharing models with infrastructure partners, which may limit future margin expansion and net earnings despite top-line growth.
  
• Ongoing regulatory changes-such as stricter data sovereignty, privacy requirements, and the Chinese government's bias towards state-backed cloud players-could disproportionately hinder Kingsoft Cloud's ability to expand client base and achieve scale, ultimately suppressing long-term revenue and market share in favor of larger, government-affiliated competitors.

Valuation

• The assumed bullish price target for Kingsoft Cloud Holdings is $23.93, which represents two standard deviations above the consensus price target of $17.14. This valuation is based on what can be assumed as the expectations of Kingsoft Cloud Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $26.15, and the most bearish reporting a price target of just $12.71.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CN¥15.2 billion, earnings will come to CN¥587.8 million, and it would be trading on a PE ratio of 122.4x, assuming you use a discount rate of 10.7%.
• Given the current share price of $14.18, the bullish analyst price target of $23.93 is 40.7% 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.