[October 24 Analysis] Kuaishou Stock Plunges Nearly 14% After Earnings; Nomura Cuts Price Target; Analysts Worry About Heavy AI Capital Expenditure: "Actually Far Exceeds the Money That Can Be Earned"

Kuaishou (01024) After earnings, the stock once plunged nearly 14%. Nomura downgraded Kuaishou from “Buy” to “Neutral,” lowering the target price from HKD 77 to HKD 57. The firm believes management is cautious about this year’s outlook, forecasting full-year total revenue growth of about 4%, below market expectations. Due to slowing advertising growth and declining profit margins, they have lowered Kuaishou’s revenue and EPS forecasts for the next two years. They also noted increased competition in short videos and AI video generation models like “Keling.”

Blue Water Capital Chief Investment Officer Li Zeming stated in a video program that Kuaishou’s earnings beat expectations, with profit growth outpacing revenue, and adjusted profit reaching a new high. However, after the earnings, the stock price fell sharply. The market is mainly concerned about the company’s increased AI investments. Last year, Kuaishou’s capital expenditure was RMB 11 billion, and this year it plans to increase to RMB 26 billion. “AI capital expenditure is under scrutiny; it’s quite large—much more than the profits it can generate.”

Li Zeming said that large AI capital spending may not immediately impact earnings but clearly puts pressure on cash flow and affects investor confidence. “The capital markets are starting to doubt whether AI investments will deliver reasonable returns, or whether they might be ineffective.” He believes Kuaishou’s capital expenditure is excessive, but the stock’s decline is overdone. “It has fallen too much; earnings are actually solid, and Keling AI has delivered results.” He mentioned that the current irrational sell-off in Kuaishou stock should be waited out, and it’s not a good time to buy the dip.

He also noted that OpenAI has suspended the Sora AI video generation service and ended its partnership with Disney (NYSE: DIS). The market initially thought that Keling AI lost a strong competitor, but concerns later shifted to increased legal risks related to copyright issues in AI video generation, which could weaken returns on overseas investments.

Last year, Kuaishou’s revenue and profit hit new highs. In the fourth quarter alone, adjusted net profit was RMB 5.46 billion, up over 16% year-on-year, with revenue exceeding RMB 39.5 billion, an increase of about 12%. Keling AI revenue was RMB 340 million. Management pointed out that Keling AI’s revenue maintained a strong growth trend, with January’s ARR surpassing USD 300 million, and they are confident that Keling AI’s revenue will double this year.