Export Controls And Global Price Wars Will Cripple Future Prospects

Key Takeaways

• Intensifying competition, regulation, and technological barriers threaten margins, revenue growth, and the ability to innovate or expand internationally.
  
• Heavy reliance on a few major clients and escalating infrastructure investments increase exposure to volatility and limit diversification prospects.
  
• Expansion in AI and public cloud, strategic partnerships, and disciplined investments are improving revenue streams, operational efficiency, and long-term profitability prospects despite near-term margin pressures.

Catalysts

Provides cloud services to businesses and organizations primarily in China.

• Persistent US-China tech decoupling and tightening export controls are likely to limit Kingsoft Cloud's access to cutting-edge chips and hardware, forcing heavy reliance on domestically produced alternatives that may lag in performance, resulting in rising capital expenditures, constrained service quality, and a shrinking addressable market, ultimately suppressing revenue growth and compressing net margins over the long term.
  
• Aggressive price competition from global hyperscale cloud providers and increased commoditization of cloud services in China are expected to further erode Kingsoft Cloud's pricing power, pressuring already thin gross margins and impairing the company's ability to achieve consistent profitability.
  
• Structural dependence on a small number of major ecosystem clients, such as Xiaomi and Kingsoft, heightens the risk of customer concentration, exposing future revenue to significant volatility and limiting diversification, especially as enterprise cloud growth remains tepid and volatile.
  
• The accelerating need for advanced AI and edge computing capabilities demands sustained, massive investments in research and infrastructure, yet Kingsoft Cloud's recurring operating losses and heavy CapEx outlays suggest its ability to keep pace is highly questionable, risking falling behind technologically, stalling revenue expansion, and persistent negative earnings.
  
• Rapidly shifting data localization policies and stricter privacy regulations are projected to increase compliance costs and create formidable barriers to international expansion, further restricting revenue streams and exacerbating the company's overexposure to an increasingly saturated and fiercely competitive domestic market.

Kingsoft Cloud Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Kingsoft Cloud Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Kingsoft Cloud Holdings's revenue will grow by 17.2% annually over the next 3 years.
• The bearish analysts are not forecasting that Kingsoft Cloud Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Kingsoft Cloud Holdings's profit margin will increase from -24.1% to the average US IT industry of 7.4% in 3 years.
• If Kingsoft Cloud Holdings's profit margin were to converge on the industry average, you could expect earnings to reach CN¥945.7 million (and earnings per share of CN¥3.06) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 40.4x on those 2028 earnings, up from -14.7x today. This future PE is greater than the current PE for the US IT industry at 26.4x.
• 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

• The company is experiencing strong year-over-year revenue growth, driven by both public cloud (up 14 percent) and AI-related business (AI gross billing up over 200 percent), with the AI segment now making up a major part of public cloud revenue, indicating expansion of the top line and large addressable market opportunity.
  
• Strategic cooperation with large ecosystem partners such as Xiaomi and Kingsoft is deepening, with revenue from these partners rising 50 percent year-over-year and now accounting for 25 percent of total revenue, which diversifies the customer base and creates more stable and predictable revenue streams.
  
• Investments in proprietary AI infrastructure, training, and inference platforms-along with one-stop AI services for government, gaming, healthcare, and finance-are positioning the company to capture higher-margin, value-added contracts, which can drive margin expansion over the long term.
  
• Despite gross margin compression in the most recent quarter, management has articulated that margin fluctuations are largely due to upfront investments and seasonality, with expectations for improving margins in subsequent quarters as large contracts are recognized and cost discipline is maintained, which can enhance profitability and net margins.
  
• The company has demonstrated operational efficiency by reducing certain operating expenses year-over-year and is using flexible financing models (including leasing and bank partnerships) to support AI infrastructure expansion without overburdening cash flow, which strengthens the balance sheet and supports future earnings growth.

Valuation

• The assumed bearish price target for Kingsoft Cloud Holdings is $12.71, which represents the lowest price target estimate amongst analysts. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be CN¥12.8 billion, earnings will come to CN¥945.7 million, and it would be trading on a PE ratio of 40.4x, assuming you use a discount rate of 10.7%.
  
• Given the current share price of $14.18, the bearish analyst price target of $12.71 is 11.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.