Source: Beast Finance Author: Beast Finance
Stock underperforms, valuation cut after second-quarter earnings
On August 23, Zhihu (ZH) released its financial report for the second quarter of 2023 before the market. But investors took a negative view on Zhihu’s second-quarter earnings, as evidenced by Zhihu’s share price performance and valuation cuts.
Before the financial report was released, Zhihu’s share price had fallen from $1.09 on August 22 to $0.99 on August 23, a drop of -9.4%. This is the first time that Zhihu’s share price has fallen below $1 in the past three months.
In addition, based on the company's closing price of US$0.99, Wall Street's valuation multiple of Zhihu's price and revenue in the next 12 months has been reduced to 0.84 times (data source: S&P Capital IQ). This means that Zhihu’s valuation has hit a record low. Since Zhihu was listed on the New York Stock Exchange in March 2021, the market's price-to-sales ratio for Zhihu has been as high as 14.1 times, and the historical average price-to-sales ratio has been 3.8 times.
In the following, Boldbeast Finance will analyze why Zhihu's stock price drop after the financial report is released is reasonable.
Zhihu’s revenue and operating losses fell short of expectations
In our previous analysis article on Zhihu, we warned that "the possibility of Zhihu's second-quarter financial report exceeding market expectations is very low," and the facts have proven that we were right.
Zhihu’s revenue in the second quarter was 1.044 billion yuan. This means that Zhihu's revenue growth has slowed significantly from +31.0% in the second quarter of 2022 and +33.8% in the first quarter of 2023 to +24.9% in the second quarter of 2023. In addition, according to data from S&P Capital IQ, Zhihu’s actual revenue in the second quarter was also lower than the 1.048 billion yuan previously predicted by Wall Street analysts.
In the second quarter of this year, marketing services dragged down Zhihu’s revenue. Specifically, Zhihu's marketing services revenue fell by 14% year-on-year, from RMB 478 million in the second quarter of 2022 to RMB 413 million in the second quarter of 2023. During its second-quarter earnings call, Zhihu explained that it had "phased out some low-margin marketing services and products," but that it still hurt its revenue.
Zhihu's GAAP operating loss also expanded from -217 million yuan in the first quarter of this year to -327 million yuan in the second quarter. Before the announcement of the second quarter 2023 financial report, Wall Street expected Zhihu to achieve a relatively small net loss (317 million yuan).
Zhihu noted that its vocational training business is "still in the investment stage" and highlighted its "new investments in generative AI technology" during its second-quarter earnings call. Beast Finance believes that this may be the key factor that causes Zhihu’s operating loss in the second quarter of 2023 to exceed expectations.
Difficult to strike a balance between growth and profitability
Zhihu emphasized during its second-quarter 2023 earnings call that its goal is to "advance our progress in terms of profitability while prioritizing healthy development and sustainable (revenue) growth."
Beast Finance believes that Zhihu will still face a difficult balance in the foreseeable future. Because Zhihu is still in the transformation stage. On the one hand, Zhihu needs to optimize its fees and investments to achieve positive returns as quickly as possible. Zhihu, on the other hand, must allocate sufficient funds to support its new growth in areas such as vocational training and generative artificial intelligence.
It is worth noting that at the second quarter financial report meeting, Zhihu did not give a specific answer to the question raised by an analyst "whether there is any update on the timetable to achieve breakeven." However, it emphasized in its second-quarter financial report that its "strategy to reduce losses is proceeding as planned."
Based on consistent financial forecast data from S&P Capital IQ, Zhihu expects to generate positive normalized non-GAAP earnings by fiscal 2025 and positive GAAP net income by fiscal 2026. However, S&P Capital IQ's consistent financial forecast data shows that Wall Street expects Zhihu's revenue to decline for three consecutive years during the 2024-2026 fiscal year.
These data also support our view that Zhihu will find it challenging to strike a balance between revenue growth and profitability improvement.
in conclusion
In view of this, Beast Finance is not optimistic about Zhihu stocks.
Boldbeast Finance is committed to enabling every unwilling young man to learn how to invest in Hong Kong and US stocks, and to experience the fun and excitement of being the shareholder of the world's largest company in the most mature and compliant market in the world. Let every young person gain freedom through Hong Kong and US stock investment with dignity and equality.