AI Content Ecosystem And Membership Engine Will Reshape Long Term Earnings Potential

Catalysts

About Zhihu

Zhihu operates a knowledge focused online community in China that connects users, expert creators and enterprise clients through Q&A, content subscriptions and related services.

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

• The rapid build out of Zhihu Zhida and other agentic AI tools, including higher penetration in search and creator workflows, positions Zhihu to sit at the center of AI powered knowledge discovery in China, which can support higher advertising and membership revenue over time.
• Zhihu’s role as an upstream provider of trusted, high quality content and data for Chinese LLMs, supported by a large base of AI focused engineers and researchers on the platform, can increase its relevance to AI companies and raise the monetization potential from enterprise clients and marketing services revenue.
• Strong growth in daily creation of high quality content and in professional creator activity across science, AI, humanities and social sciences can deepen user engagement and retention, which is often a key driver for membership revenue and advertising yield.
• The paid membership engine, anchored by 14.3 million average monthly paid members and supported by initiatives like Yanyan Story, voice live streaming and expanded membership benefits, provides multiple levers to support ARPU and membership revenue, which can flow through to operating earnings if cost discipline continues.
• Yanyan Story’s rapid expansion across Asian and global markets, including IP licensing, short drama adaptations and multi language distribution partnerships, opens a scalable content export channel that can diversify revenue and, if managed efficiently, contribute positively to net margins.
• Ongoing cost optimization, a more efficient operating structure and a sizeable cash and investment balance of RMB 4.6b give Zhihu room to keep investing in AI capabilities, creator tools and higher value clients while targeting non GAAP breakeven, which can support earnings resilience.

Assumptions

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

• The bullish analysts are assuming Zhihu's revenue will decrease by 4.8% annually over the next 3 years.
• The bullish 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¥250.4 million (and earnings per share of CN¥3.65) by about January 2029, up from CN¥102.0 million today.
• 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 15.1x on those 2029 earnings, down from 20.0x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 15.4x.
• The bullish 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 9.15%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Revenue is still in adjustment mode, with total revenue at RMB 658.9 million compared with RMB 845 million in the same quarter of 2024. Management explicitly described marketing services and paid membership as being in or near bottoming phases, so a longer period of weak demand for advertising or slower membership recovery could keep revenue under pressure and delay any uplift in earnings.
• Paid membership revenue was RMB 385.6 million compared with RMB 459.4 million a year earlier, and management noted that membership is still in transition and may not have reached a floor. If users do not consistently accept new content mixes, benefits and formats, member churn or weaker ARPU could weigh on revenue and limit any improvement in net margins.
• Zhihu is investing heavily in AI products like Zhihu Zhida and creator tools while research and development expenses have been reduced from RMB 179.3 million to RMB 114.4 million year over year. This may constrain long-term product quality or differentiation, and if AI adoption on the platform or by enterprise clients stalls, the expected AI driven monetization may not materialize, limiting earnings growth potential.
• Marketing services revenue was RMB 189.4 million compared with RMB 256.6 million a year earlier, and the company is concentrating on higher value clients and refined service offerings. If advertiser budgets remain tight or competitors capture AI related brand spend, ad loads or pricing could stay softer for longer, which would cap revenue growth and slow any improvement in operating margins.
• Despite cost cuts that reduced operating expenses by 19.4% year over year to RMB 503.5 million, Zhihu still reported a GAAP net loss of RMB 46.7 million and a non-GAAP adjusted net loss of RMB 21 million, and management is using 2025 as an investment and adjustment window. Prolonged spending on AI, content and buybacks without a clear and sustained return could erode the RMB 4.6b cash and investment balance over time and keep net margins and earnings in loss making territory.

Valuation

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

• The assumed bullish price target for Zhihu is $6.05, which represents up to two standard deviations above 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 bullish 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 bullish analyst cohort, you'd need to believe that by 2029, revenues will be CN¥2.6 billion, earnings will come to CN¥250.4 million, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of $3.46, the analyst price target of $6.05 is 42.8% 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.