Kingsoft Cloud Revenue Surges 37%, but Declining Gross Margin Raises Concerns

Overview

Nomura Securities released a rapid earnings commentary on Kingsoft Cloud (3896.HK / KC.US) for Q1 FY26. The report shows that Kingsoft Cloud achieved robust 37% YoY revenue growth, primarily driven by sustained demand from the Xiaomi (1810 HK) and Kingsoft (3888 HK) ecosystems, AI-related customer demand, and improved penetration among enterprise cloud customers. However, gross margin declined sharply by 3.4 percentage points YoY to 12.8%, constituting the central cautionary signal highlighted in the report. Although AI-driven demand is expected to support full-year growth, the downward trend in gross margin remains a critical risk requiring close attention even as the Buy rating is maintained.

Core views

Demand-side: Kingsoft Cloud’s Q1 FY26 revenue reached RMB 2.7 billion, up 37% YoY, propelled by three main drivers: (i) continued demand from the Xiaomi (1810 HK) and Kingsoft (3888 HK) ecosystems; (ii) rapid growth from AI-related customers; and (iii) further penetration among enterprise cloud customers. By segment, Public Cloud revenue surged 47.5% YoY, with AI-related gross billings rising 90% YoY and accounting for over 50% of Public Cloud revenue for the first time—confirming AI as the core engine of Public Cloud growth. Enterprise Cloud revenue increased 14.7% YoY, benefiting from accelerated execution of enterprise projects. Profitability: In contrast to strong top-line growth, gross margin faced notable pressure. Q1 FY26 gross margin stood at only 12.8%, down 3.4 pp YoY and 4.1 pp QoQ. Management attributes this decline to three factors: rising server costs, expansion of AI-related services (which typically carry lower initial margins), and upfront investment costs associated with certain customers. Non-GAAP net loss widened from RMB 95 million in Q4 FY25 to RMB 237 million, largely due to the gross margin decline. Investment & Outlook: Total capital expenditures and leased assets amounted to RMB 3.0 billion in Q1 FY26. Management explicitly stated that further investments will continue throughout FY26 to support business expansion. Nomura believes core customers’ AI-related demand will remain robust in FY26, but the downward trajectory of gross margin remains a key risk requiring monitoring. Based on a DCF valuation, Nomura maintains its Buy rating and HKD 8.50 target price, implying a 2.9x FY26 forward P/S multiple.

Analysis framework

Nomura employs the DCF (Discounted Cash Flow) valuation methodology as its core pricing framework, assuming a weighted average cost of capital (WACC) of 10%, a market risk premium of 8.9%, and a terminal growth rate of 3.5%. Cash flows are discounted back to 2025 to derive a 12-month forward valuation. This target price implies a 3.5x FY25/2.9x FY26 forward P/S multiple, benchmarked against the Hang Seng Composite Index. Analytically, the report follows a three-tiered, hierarchical framework: 'Revenue Growth → Gross Margin → Profitability'. First, it validates top-line growth drivers (AI demand, ecosystem customers, enterprise penetration); second, it examines mid-layer gross margin dynamics (cost structure, business mix, customer composition); and finally, it assesses bottom-line profitability and investment returns (capex, net loss trends).

Methodology notes

• Valuation MethodDCF Discounted Cash Flow

  Discounted Cash Flow Valuation

  Estimates intrinsic company value by forecasting future free cash flows and discounting them to present value using an appropriate discount rate. In this report, Nomura applies assumptions of WACC = 10% and terminal growth rate = 3.5%, anchoring its valuation to a 12-month forward horizon to reflect the high-growth, heavy-upfront-investment nature of cloud computing businesses.

• Valuation MethodPS valuation

  Price-to-Sales Valuation

  For high-growth, pre-profitability technology companies, PS (Price/Sales) serves as a common valuation anchor. Nomura’s implied FY26 P/S multiple of 2.9x facilitates peer-group comparisons across cloud peers and reflects market pricing logic for high-growth, low-margin businesses.

• Industry/ Sector Analysis FrameworkVolume-price decomposition

  Revenue and Gross Margin Volume-Price Decomposition Analysis

  Core analysis of the cloud industry hinges on distinguishing 'volume' (revenue scale and growth rate) from 'price' (gross margin and unit-level economics). This report follows precisely that framework: first affirming strong 'volume' growth (revenue +37%, AI billings +90%), then highlighting 'price'-related risks (GPM -3.4pp), and ultimately assessing how this 'volume-up, price-down' combination impacts enterprise value.

Key data

• Q1 FY26 RevenueRMB 2.7 billionUp 37% YoY, down 2% QoQ
• Public Cloud Revenue GrowthUp 47.5% YoYAI-related gross billings up 90% YoY
• Enterprise Cloud Revenue GrowthUp 14.7% YoYBenefiting from accelerated enterprise projects
• Gross Margin (GPM)12.8%Down 3.4 pp YoY, down 4.1 pp QoQ
• Non-GAAP Net LossRMB 237 millionCompared to RMB 95 million in Q4 FY25; loss widened
• Capital Expenditures and Leased AssetsRMB 3.0 billionQ1 FY26 only; management expects continued investment in FY26
• Target Price Implied P/S2.9x FY26FCurrent share price implies 2.6x FY26F P/S
• Target PriceHKD 8.50Maintains Buy rating, implying ~25% upside potential

Impact & implications

Nomura believes Kingsoft Cloud is entering a pivotal AI-driven growth phase, with robust demand from core customers—including Xiaomi, the Kingsoft ecosystem, and AI clients—expected to persist through FY26. However, the persistent decline in gross margin signals key considerations for investors: (i) whether cost pressures from early-stage AI service expansion are temporary; (ii) when infrastructure investments (e.g., servers) will translate into scale efficiencies and margin improvement; and (iii) the impact of sharply rising capex on cash flow sustainability. If gross margin fails to stabilize or rebound in subsequent quarters—even with sustained top-line growth—market confidence in the company’s path to profitability may erode. The report maintains its Buy rating but explicitly flags the GPM downtrend as a critical risk, suggesting valuation recovery hinges on visible signs of improving profitability.

Risks

• Slower-than-expected expansion of Public Cloud (including AI Cloud) business due to decelerating internet sector growth
• Weaker-than-expected enterprise customer demand, affecting Enterprise Cloud growth
• Intensifying industry competition, potentially leading to faster-than-expected declines in net dollar retention rates among premium Public Cloud customers

What to watch

• Whether gross margin stabilizes or rebounds in upcoming quarters
• Impact of rising AI-related revenue share on overall profitability
• Efficiency of capital expenditure conversion into revenue growth