AI Investment Pressure And Weak Revenue Will Challenge Margins Yet Long-Term Content Demand Should Endure

Catalysts

About Zhihu

Zhihu operates a Chinese online knowledge-sharing community that connects users, expert creators and enterprise clients through high-quality, discussion-based content enhanced by AI tools.

What are the underlying business or industry changes driving this perspective?

• Although AI integration across search and content creation is deepening and raising user engagement, the heavy and ongoing investment required to keep pace with rapidly evolving large model capabilities could cap operating leverage and delay meaningful expansion of net margins.
• Although Zhihu is becoming an important upstream data and content source for AI ecosystems and enterprise collaborations, dependence on a concentrated set of high-value tech and AI clients exposes marketing services revenue to volatility if sector budgets tighten or shift to in-house solutions.
• While the rise of young, learning-focused users and continuous learners provides a solid demand base for knowledge services, their relatively cautious spending behavior and preference for free AIGC tools may limit paid membership ARPU growth and slow earnings recovery.
• While international IP licensing and short-form literature adaptations are gaining traction and diversifying content monetization, execution risks in overseas localization, partner quality and regulatory environments could restrict the scale of high-margin IP revenue contributions.
• Although creator tools and AI copilots are lowering barriers for mid-tier contributors and expanding the content supply, the need for stricter governance to preserve trusted, professional content could raise compliance and moderation costs, constraining improvements in overall profit margins.

Assumptions

This narrative explores a more pessimistic perspective on Zhihu compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Zhihu's revenue will decrease by 8.5% annually over the next 3 years.
• The bearish analysts are not forecasting that Zhihu will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Zhihu's profit margin will increase from 3.4% to the average US Interactive Media and Services industry of 9.8% in 3 years.
• If Zhihu's profit margin were to converge on the industry average, you could expect earnings to reach CN¥222.2 million (and earnings per share of CN¥3.24) by about December 2028, up from CN¥102.0 million today.
• 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 12.1x on those 2028 earnings, down from 19.2x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 16.7x.
• The bearish analysts expect the number of shares outstanding to decline by 4.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.11%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The long-term shift of users toward AI generated content and free AI tools could reduce willingness to pay for Zhihu's premium memberships and vocational style offerings, putting sustained pressure on paid membership revenue and limiting ARPU expansion, which would weigh on overall earnings growth.
• Despite strategic repositioning toward high quality growth, total revenues declined from RMB 845 million to RMB 658.9 million year on year in the third quarter of 2025. If this revenue contraction persists while AI and content investments continue, operating leverage may not materialize and net margins could remain negative.
• Zhihu is leaning heavily into its role as an upstream data and content provider to AI ecosystems and enterprise clients. Any slowdown in China’s AI deployment cycle, budget cuts at large tech advertisers or a shift to in house solutions could stall the recovery in marketing services revenue and constrain long term earnings potential.
• The company is targeting full year non GAAP profitability while simultaneously cutting research and development expenses by over 36 percent year on year in the third quarter of 2025. If this underinvestment causes Zhihu's AI capabilities to lag stronger competitors, user engagement and monetization efficiency could deteriorate, hurting both revenue growth and net margins.
• Growth in international IP licensing and short form literature adaptations is coming off a low base and is exposed to execution and regulatory risks in multiple overseas markets. If these initiatives fail to scale as envisioned, the expected high margin contribution to Zhihu's profit mix and long term earnings will be significantly lower than implied by the current strategy.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Zhihu is $4.3, which represents up to two standard deviations below the consensus price target of $5.27. This valuation is based on what can be assumed as the expectations of Zhihu'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 $6.05, and the most bearish reporting a price target of just $4.3.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be CN¥2.3 billion, earnings will come to CN¥222.2 million, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $3.31, the analyst price target of $4.3 is 23.0% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.