Proprietary AI Platform 'singular' Will Drive Future Efficiency And Customer Acquisition

Key Takeaways

• Strategic partnerships and significant projects aim to increase revenue and profitability through enhanced digital transformation and cloud services.
  
• AI integration drives rapid growth and profitability, as technology advancements bolster efficiency and customer acquisition, improving gross margins.
  
• Heavy reliance on AI and Xiaomi Kingsoft, alongside high capital expenditures and market volatility, poses risks to revenue stability and long-term growth.

Catalysts

Provides cloud services to businesses and organizations primarily in China.

• The strategic partnership with the Xiaomi Kingsoft ecosystem is expected to drive substantial future revenue growth, with approved commitments of RMB 11.3 billion over the next three years, potentially enhancing both revenue and profitability.
  
• Kingsoft Cloud's rapid growth in AI-related revenues, which increased by nearly 500% year-over-year, is a strong indicator of future revenue expansion as AI integration continues to deepen across industries.
  
• The company's successful shift towards an AI-driven business strategy, evidenced by a turnaround to profitability in non-GAAP operating profit and achieving positive non-GAAP EBITDA margin, suggests improved future earnings potential.
  
• Completion of significant projects, such as the Wuhan Optics Valley cloud platform, positions Kingsoft Cloud to capitalize on digital transformation in public services, potentially boosting revenue through increased enterprise cloud services.
  
• Enhanced technology and product offerings, including the release of the ninth generation cloud server and the proprietary training and inference platform (Singular), are likely to drive efficiency and customer acquisition, contributing to improved gross margins and earnings.

Kingsoft Cloud Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kingsoft Cloud Holdings's revenue will grow by 19.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -25.3% today to 3.9% in 3 years time.
• Analysts expect earnings to reach CN¥523.0 million (and earnings per share of CN¥0.7) by about March 2028, up from CN¥-2.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥732 million in earnings, and the most bearish expecting CN¥163.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 71.5x on those 2028 earnings, up from -13.1x today. This future PE is greater than the current PE for the US IT industry at 44.7x.
• Analysts expect the number of shares outstanding to grow by 2.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.51%, as per the Simply Wall St company report.

Kingsoft Cloud Holdings Future Earnings Per Share Growth

Risks

• Kingsoft Cloud's reliance on AI and the Xiaomi Kingsoft ecosystem for growth, which while beneficial, may introduce risk if AI demand or the ecosystem partnership falters, affecting revenue stability and projections.
  
• The significant capital expenditures required for AI and computing infrastructure may strain financial resources, impacting net margins and overall earnings if revenue growth does not keep pace.
  
• Fluctuations in supply and demand for high-performance AI servers could lead to pricing volatility, potentially affecting revenue from AI cloud services and impacting profitability.
  
• Potential stringent supply-side restrictions and technological shifts in AI demand may pose challenges to achieving expected revenue growth, impacting long-term financial projections.
  
• Competition in the AI and cloud services sector presents ongoing execution risks, which could lead to challenges in sustaining revenue growth and expanding market share, thus affecting future profitability and earnings.

Valuation

• The analysts have a consensus price target of $15.777 for Kingsoft Cloud Holdings 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 $25.94, and the most bearish reporting a price target of just $4.1.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥13.3 billion, earnings will come to CN¥523.0 million, and it would be trading on a PE ratio of 71.5x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of $15.43, the analyst price target of $15.78 is 2.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.