Advertising slowdown and AI investment weigh on Kuaishou's near-term earnings; Goldman Sachs downgrades to Neutral

Overview

This report reviews Kuaishou's second-quarter 2026 results and reassesses its core advertising and e-commerce businesses, Kling AI investment, cash flow and valuation. Goldman Sachs believes the slowdown in the core commercial businesses will persist for several quarters, while AI spending will add to near-term profit pressure. It therefore downgrades the rating from Buy to Neutral; the long-term AI transformation, net cash and shareholder returns provide support.

Core views

The core reason for Goldman Sachs' downgrade of Kuaishou is that revenue and profit remain primarily dependent on advertising and e-commerce, both of which are slowing more sharply in the second half of 2026 than previously expected. Although Kuaishou is gradually evolving from a pure short-video platform into a community platform with a greater emphasis on AI technology, and Kling AI is also scaling up, the report judges that the core commercial businesses will continue to contribute the vast majority of revenue and profit in 2026—2027. Near-term fundamentals therefore primarily depend on whether the core platform can resume growth. Goldman Sachs would need to see more evidence of an inflection point in the core business, Kling's ARR trend and progress on a spin-off before adopting a more positive view. For the core platform, Goldman Sachs revised its advertising revenue forecast for the second half of 2026 from prior low-single-digit year-over-year growth to an average year-over-year decline of 6%. On the one hand, after tax policies related to e-commerce and traffic took effect at the end of 2025, enforcement has gradually tightened in 2026, creating more visible pressure on small and medium-sized merchants on the platform. Slower consumption and e-commerce competition have also worsened the operating environment, requiring Kuaishou to invest more traffic and subsidies to support merchants. On the other hand, previously high-growth non-e-commerce advertising categories such as short-form dramas and mini-games have slowed against a high base, while growth in user time spent has stalled. The report forecasts average daily active users of 415 million in 2026, up 1% year over year, with average daily time spent per DAU of 130 minutes, flat year over year; daily active users are forecast at 417 million in 2027, essentially flat year over year. By business, e-commerce-related advertising revenue is expected to decline 5% year over year in 2026, e-commerce GMV to decline 3%, e-commerce commissions to decline 4%, and live-streaming revenue to decline 16%, indicating that pressure is not limited to advertising but also extends to e-commerce and live streaming. The revenue slowdown will flow through to profits via operating deleverage and AI spending. Sales and marketing expenses and other operating expenses cannot decline in step with advertising revenue, while AI investment has increased since the beginning of the year. Front-loaded capital expenditure in 2026 will also affect the income statement in the second half through higher depreciation and amortization and expansion of R&D teams. Goldman Sachs therefore expects the operating margin to be only in the low single digits in the second half of 2026, significantly below the low double digits in the first half. It cut its 2026—2028 revenue forecasts by 5%—10% to RMB138.2978 billion, RMB140.6592 billion and RMB147.9824 billion, respectively, from previous forecasts of RMB145.3230 billion, RMB153.2035 billion and RMB164.2957 billion. Over the same period, EPS forecasts were reduced from RMB3.70, RMB4.24 and RMB4.92 to RMB2.05, RMB2.47 and RMB2.96. Revenue is expected to decline 3.1% year over year in 2026, EPS to decline 56.4% year over year, and the EBIT margin to fall from 16.3% in 2025 to 7.7%, while pre-exceptional pre-tax net profit is expected to be RMB8.8257 billion. Goldman Sachs expects the advertising business to stabilize gradually only in 2027. Excluding Kling and other AI-related losses, the core platform could generate approximately RMB13 billion in net profit at a normalized margin in 2027 and return to an operating margin above 10% over the medium to long term. Kling AI is both a source of long-term strategic value and a source of current costs and competitive risk. The company guided for Kling's third-quarter 2026 revenue to remain flat quarter over quarter at the second quarter's RMB850 million. Goldman Sachs believes the lack of major model upgrades since February, coupled with intense competition in AI video generation, is the main reason for the temporary growth stagnation; overseas weekly active users have also remained broadly flat after surging in May. The next major model upgrade could be launched within the next 1—2 months, in September or October. Goldman Sachs expects ARR and revenue to jump in the fourth quarter following the release of the new model, with full-year 2026 revenue reaching US$511 million and year-end ARR reaching US$800 million, up from approximately US$500 million in March. Meanwhile, Seedance 2.5 and the open-weight Minimax H3 model create competitive pressure. How Kling balances generation quality and video pricing is a key variable; the report also notes that Kling 3.0, released in February, is at a disadvantage relative to peers when quality and price are considered together. In terms of capital allocation, Kuaishou plans RMB26 billion of capital expenditure in 2026, of which RMB17 billion was invested in the first half, causing first-half free cash flow to turn negative. Because spending was front-loaded during the year, Goldman Sachs believes free cash flow could remain broadly around breakeven over the next several quarters as capital expenditure growth normalizes; management's goal is to achieve positive free cash flow over the next several quarters. The company has announced a HK$16 billion share purchase program through 2027, of which more than approximately 50% has currently been utilized. Based on this, the report estimates a current shareholder return yield of approximately 5% or more. The company had approximately RMB80 billion in net cash as of 2025, equivalent to more than 60% of its market capitalization. Together with a shareholder return policy no lower than the 2025 level, this is viewed as limiting further downside. On valuation, Kuaishou trades at 11 times 2027E P/E based on Goldman Sachs' revised forecasts. The new HK$38 target price applies 13 times 2027E P/E, below the previous 15 times average 2026—2027E P/E, reflecting a weaker growth and margin outlook for the core platform; 13 times is also in line with Goldman Sachs' average Internet-sector P/E. As a sum-of-the-parts valuation cross-check, applying Kling's latest financing-implied overall valuation of US$18 billion and Kuaishou's 68% effective interest yields a Kling equity value of approximately US$12 billion. After applying a 10% holding-company discount, the new target price implies only 6 times 2027E P/E for the core platform. This is below the 8—10 times range of e-commerce peers and close to the 5—7 times range of some low-growth companies. Goldman Sachs still considers the current valuation broadly fair because there is no clear visibility into a recovery in the core platform over the next 2—3 quarters. The 13% upside from the current price of HK$33.64 to the target price is also below the sector median of 30%. The long-term backdrop also explains the valuation discount. Since Goldman Sachs initiated coverage with a Buy rating on September 4, 2022, Kuaishou's share price has fallen 43%, while the Hang Seng Index has risen 31% over the same period. The report attributes the weak relative performance to the gradual maturation of user and time-spent growth on the core video platform, intensifying competition with ByteDance and Tencent in short video and advertising, and market concerns about the medium-term competitive landscape that have compressed valuation multiples. Goldman Sachs consequently adopts a Neutral view: it is waiting for a recovery in the core platform and validation of returns on AI investment in the near term, while acknowledging that net cash, shareholder returns and the option value of a Kling spin-off provide potential support.

Analysis framework

Goldman Sachs first identifies changes in the growth rates of the advertising, e-commerce and live-streaming businesses from the second-quarter results, then explains the slowdown in the core platform by examining tax enforcement, the operating environment for small and medium-sized merchants, industry competition, user scale and time spent. It subsequently translates slower revenue, rigid expenses, capital expenditure, depreciation and amortization, and R&D expansion into its 2026—2028 profit forecasts, while separately assessing Kling's revenue trajectory, model upgrades and competitive position. Finally, the report determines the target price using 2027E P/E and cross-checks it against sum-of-the-parts valuations for the core platform and Kling, peer multiples, net cash and shareholder returns.

Methodology notes

• Valuation MethodPE/PEG valuation

  2027E target P/E valuation

  The report applies a target P/E of 13 times to Goldman Sachs' forecast 2027 EPS to derive a 12-month target price of HK$38; it previously used 15 times average 2026—2027E P/E.

• Valuation MethodSOTP Valuation

  Sum-of-the-parts valuation cross-check of the core platform and Kling equity value

  The report estimates Kling's equity value at approximately US$12 billion based on Kling's overall financing-implied valuation of US$18 billion and Kuaishou's 68% effective interest, then applies a 10% holding-company discount, implying approximately 6 times 2027E P/E for the core platform.

• Corporate Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Operating deleverage amid slowing revenue

  When advertising revenue slows sharply, sales, marketing and other operating expenses cannot be reduced proportionately. Combined with AI R&D investment, this causes changes in revenue to have a greater negative impact on the operating margin and net profit.

• Corporate Fundamentals and Financial FrameworkFree cash flow analysis

  Front-loaded capital expenditure and the path to free cash flow recovery

  The report compares capital expenditure and free cash flow performance in the first half of 2026 and concludes that, as capital expenditure growth normalizes, free cash flow could improve from negative territory to broadly breakeven over the next several quarters.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Kuaishou Technology (1024.HK)

  The company covered by the report; it is currently weighed down by slowing advertising, e-commerce and live streaming and by AI investment, while its long-term value is linked to Kling's expansion, a recovery in the core platform and shareholder returns.

  Strengths

  Approximately RMB80 billion in net cash, an ongoing shareholder return program, normalized earnings capacity of the core platform, and the growth and spin-off optionality of Kling AI.

  Weaknesses

  Growth in users and time spent is maturing, the core commercial businesses account for most revenue and profit, visibility into an advertising recovery is low, and AI R&D and capital expenditure are weighing on near-term profits and cash flow.

  Comparison

  The core platform's cross-checked valuation is approximately 6 times 2027E P/E, below the 8—10 times of e-commerce peers and close to the 5—7 times of some low-growth peers; the target-price upside of 13% is below the sector median of 30%.

  Risks

  The recovery in advertising budgets, the pace of Kling commercialization, actual profitability, and AI capital expenditure and investment could all deviate from forecasts.

Key data

• Rating ChangeDowngraded from Buy to NeutralDowngraded after the release of second-quarter 2026 results
• 12-month Target PriceHK$38.00Based on 13 times 2027E P/E
• Current Price and Potential UpsideHK$33.64；13.0%The closing price used in the report and the upside implied by the target price
• Advertising Growth in the Second Half of 2026Approximately 6% year-over-year declinePreviously forecast low-single-digit year-over-year growth
• 2026—2028 Revenue ForecastsRMB138.2978 billion, RMB140.6592 billion, RMB147.9824 billionPrevious forecasts were RMB145.3230 billion, RMB153.2035 billion and RMB164.2957 billion, representing overall cuts of 5%—10%
• 2026—2028 EPS ForecastsRMB2.05, RMB2.47, RMB2.96Previous forecasts were RMB3.70, RMB4.24 and RMB4.92
• Net Profit Forecast RevisionCut by 40%—45%Dragged by operating deleverage, Kling AI R&D investment and an unfavorable advertising mix
• 2026 Growth and MarginRevenue growth -3.1%；EPS growth -56.4%；EBIT margin 7.7%The EBIT margin was 16.3% in 2025
• Operating Margin in the Second Half of 2026Low single digitsLow double digits in the first half of 2026
• Kling Third-quarter Revenue GuidanceRMB850 millionExpected to remain flat quarter over quarter versus the second quarter of 2026
• Kling Year-end ARR ForecastUS$800 millionAbove the approximately US$500 million level in March 2026
• Kling 2026 Revenue ForecastUS$511 millionFourth-quarter revenue is expected to accelerate following a major model upgrade
• 2026 Capital ExpenditureRMB26 billionRMB17 billion was invested in the first half, with spending front-loaded during the year
• Share Purchase ProgramHK$16 billion through 2027More than approximately 50% has currently been utilized, implying a shareholder return yield of approximately 5% or more
• Net CashApproximately RMB80 billionAs of 2025, equivalent to more than 60% of market capitalization
• Current Valuation11 times 2027E P/ECalculated based on Goldman Sachs' revised forecasts
• Sum-of-the-parts Valuation Cross-checkKling equity value of approximately US$12 billion；core platform at 6 times 2027E P/EBased on Kling's overall financing-implied valuation of US$18 billion, a 68% effective interest and a 10% holding-company discount
• Historical Relative PerformanceKuaishou -43%；Hang Seng Index +31%Since Goldman Sachs initiated coverage on September 4, 2022

Impact & implications

The report believes Kuaishou's primary issues over the next 2—3 quarters will remain slowing advertising, e-commerce and live-streaming revenue on the core platform, as well as margin compression caused by rigid expenses and AI investment. Kling's model upgrades, commercialization and potential spin-off could provide upside optionality, but until there is more evidence of a recovery in the core business and returns on AI investment, the current valuation and 13% target-price upside are insufficient to support the previous Buy rating. Net cash, the gradual normalization of capital expenditure, share repurchases and the shareholder return policy should help cushion downside pressure.

Risks

• The recovery in advertising budgets could be slower than expected.
• Kling's commercialization could be faster or slower than expected, affecting revenue, valuation and the path to narrowing losses.
• Actual profitability could be higher or lower than expected.
• The scale of AI capital expenditure and investment could deviate from expectations and affect profits and free cash flow.

What to watch

• Watch Kling's next major model upgrade, which could launch in September or October 2026, as well as related spin-off progress.
• Watch for commentary at Kuaishou's investor day in late August 2026 regarding visibility into user community and advertising growth.
• Watch the pace of Kuaishou's share repurchases and dividend payments during 2026.