2023-12-10 23:21:05 ET
Summary
- Zhihu's revenue growth prospects for 2023 are unfavorable, with analysts projecting a slowdown in expansion.
- The company's marketing services segment performed poorly in Q3 2023 and is expected to remain under pressure.
- ZH aims to achieve breakeven in one quarter of FY 2024 but does not expect to generate positive earnings for the full year.
Elevator Pitch
My rating for Zhihu Inc. ( ZH ) [2390:HK] is a Hold.
Earlier, my August 24, 2023 article drew attention to ZH's Q2 2023 performance. In this current write-up, I assess Zhihu's prospects for Q4 2023 and 2024.
I have made the decision to stick to my existing Hold investment rating for ZH. The company's Q4 2023 revenue outlook is lackluster judging by the change in consensus top line estimates and the management's comments on the marketing services segment. But Zhihu anticipates delivering a quarter of positive earnings in the coming year, which is a key positive for the stock.
Readers should note that Zhihu's shares are dual primary listed on the New York Stock Exchange and the Hong Kong Stock Exchange, and the listed company's current market capitalization is slightly above $600 million. The three-month average daily trading values for the company's US-listed and Hong Kong-listed shares were $3 million and $0.1 million, respectively as per S&P Capital IQ data. Zhihu's US-listed shares with the ZH ticker symbol are relatively more liquid. But investors also have the choice of trading in its Hong Kong-listed shares with the 2390:HK ticker symbol using US brokerages like Interactive Brokers.
Unexciting Revenue Outlook
The market has an unfavorable view of Zhihu's revenue growth prospects for the near term, and this seems to be justified in my opinion.
The sell side's consensus fiscal 2023 top line projection for ZH was lowered by -3% from RMB4,249 million before the company's Q3 2023 results announcement on November 29, 2023, to RMB4,130 million (source: S&P Capital IQ ) now. This implies that the analysts see Zhihu's revenue expansion (in local currency or RMB terms) moderating from +21.8% for FY 2022 to +14.6% in FY 2023.
It is unsurprising that the market has lower expectations of Zhihu's top line performance after the company reported its third quarter results. ZH's revenue contracted by -2.1% QoQ from RMB1,044 million in Q2 2023 to RMB1,022 million for Q3 2023, and Zhihu's actual Q3 2023 top line was only marginally (+0.2%) above the consensus sales estimate of RMB1,020 million.
ZH's marketing services segment was the weak spot for the company in Q3 2023, and this segment is expected to remain under pressure in the short term.
Marketing services revenue for Zhihu fell by -17% YoY to RMB383 million for the third quarter of 2023. During the same period, ZH's vocational training revenue and paid membership revenue grew by +86% YoY and +39% YoY to RMB145 million and RMB467 million, respectively.
ZH's management commentary at the Q3 2023 results call suggests that there wasn't a significant improvement in the company's marketing services segment's performance for the fourth quarter of this year. At its most recent quarterly earnings briefing, Zhihu noted that its "advertising business recovery has begun to pick up sequentially" in Q4 2023, but it highlighted its expectations that "marketing services will see a more noticeable recovery" in the following year or 2024.
A recent December 7, 2023, Seeking Alpha News article mentioned that China's November 2023 "imports declined 0.6%, missing forecasts for a 3.3% gain", which pointed to "a sluggish demand outlook" for the country, ZH's home market. This explains why expectations regarding Zhihu's marketing services revenue growth for Q4 2023 are muted. It also makes sense that the sell-side analysts have chosen to reduce their full-year FY 2023 top line forecasts for ZH.
Quarterly Breakeven Goal For 2024
ZH shared at the latest Q3 2023 earnings call that it "will update with the market our progress about the breakeven point" subsequently, but it indicated that "we believe that (the breakeven) will be (achieved) some quarter or one quarter next year."
On the positive side of things, it is encouraging to know that Zhihu aims to be profitable in one of the quarters in FY 2024. ZH highlighted its "enhanced monetization efforts as well as our improved efficiency in cloud services and the bandwidth utilization" at the recent quarterly results briefing. These have driven a +500 basis points improvement in Zhihu's gross profit margin from 48.7% in Q3 2022 to 53.7% for Q3 2023.
On the negative side of things, ZH isn't expecting to generate positive earnings for the full year. Based on data sourced from S&P Capital IQ , Zhihu is forecasted to record a normalized net loss of -RMB226 million for FY 2024, which translates into a net loss margin of -4.6%. An increase in AI-related investments, unfavorable top line mix (increased revenue from lower-margin paid membership and vocational training), and negative operating leverage (slower revenue growth as detailed in the preceding section) is likely to weigh on ZH's bottom line.
Final Thoughts
In my view, both revenue growth acceleration and sustained profitability are needed to spark a meaningful share price increase and valuation multiple expansion for Zhihu, and these two conditions aren't fulfilled at this moment. ZH's top line outlook for the short term is uninspiring and the company isn't expected to achieve full-year profitability by next year. A consensus forward next twelve months' price-to-revenue multiple of slightly below 1 times (0.91 to be specific) appears to be fair for a loss-making (full-year basis) company boasting a consensus FY 2023-2025 revenue CAGR forecast of below 20% (+16.2% to be exact) as per S&P Capital IQ data.
For further details see:
Zhihu Q3 Earnings: Still A Hold Considering Both Revenue And Profitability Expectations