pingingz
pingingz
I rate Kingsoft Cloud Holdings (NASDAQ:KC) [3896:HK] as a Hold.
My previous December 26, 2023 article touched on the prospects for KC's public cloud services (which includes the Content Delivery Network or CDN business that it is scaling down) and enterprise cloud services segments. In this latest write-up, I review Kingsoft Cloud's most recent fourth quarter financial results.
KC's Q4 2023 EBITDA loss and net loss were better than what the market had predicted earlier, thanks to the company's optimization of its operating costs and sales mix. However, Kingsoft Cloud might possibly take another year or so to turn EBITDA positive. In addition, the big jump in the company's stock price on the results announcement day would have likely priced in much of the positives relating to its fourth quarter results beat.
KC revealed the company's Q4 2023 financial performance with a press release published on March 20, 2024 before the market opened. The key highlight of Kingsoft Cloud's latest fourth quarter results was the company's narrower-than-expected losses.
The normalized EBITDA loss for Kingsoft Cloud narrowed from -RMB246.8 million in the fourth quarter of 2022 and -RMB45.4 million in the third quarter of 2023 to -RMB27.7 million for the most recent quarter. In contrast, the sell side analysts' consensus Q4 2023 non-GAAP adjusted EBITDA loss projection was much wider at -RMB73.7 million according to S&P Capital IQ data.
The company's actual non-GAAP adjusted net loss for Q4 2023 was -RMB250.4 million. This is narrower than the market's consensus normalized net loss estimate of -RMB290.1 million (source: S&P Capital IQ) and KC's actual Q4 2022 normalized net loss of -RMB552.7 million.
Kingsoft Cloud's better-than-expected losses for the latest quarter were attributable to a more favorable sales mix and good cost management.
The company's normalized gross profit margin improved by +7.3 percentage points YoY and +3.1 percentage points QoQ to 15.2% in Q4 2023. In its results press release, Kingsoft Cloud revealed that it is focusing more on "the high-quality (and high-margin) projects of the enterprise cloud segment, while cutting down the scale of CDN services with low-margin profile." This positive change to the company's sales mix has clearly paid off for KC in terms of gross margin improvement. Furthermore, KC has managed expenses very well, as the company's adjusted operating costs contracted by a significant -32% YoY in Q4 2023.
I take the view that the near-term upside for Kingsoft Cloud's shares might not be significant, despite KC's above-expectations Q4 2023 results.
In the company's Q4 2023 financial results press release, there was no mention of any financial guidance. This is unlike KC's FY 2022 results announcement which offered a forward-looking Q1 2023 sales outlook.
Kingsoft Cloud stressed at its latest fourth quarter results briefing that it is "not in a position today to give a clear guidance about the timing of the EBITDA margin breakeven as well as the profitability on OP (Operating Profit) margin side." However, KC did note at its most recent quarterly earnings call that it anticipates "good results going forward in the next few quarters."
As per the consensus financial forecasts obtained from S&P Capital IQ, the analysts only see KC achieving positive EBITDA in the first quarter of 2025, and the company's Q1 2025 results are likely to be released in late-May next year. In other words, the potential catalyst relating to Kingsoft Cloud's operating profitability inflection point is most probably going to be realized much later.
On the other hand, Kingsoft Cloud's shares surged by +16.2% at the end of the March 20, 2024 trading day, following the announcement of its better-than-expected Q4 2023 results in the morning of the same day.
Kingsoft Cloud's current consensus next twelve months' Enterprise Value-to-Revenue ratio of 0.74 times (source: S&P Capital IQ) is just slightly below its year-to-date peak Enterprise Value-to-Revenue multiple of 0.78 times.
In a nutshell, it is fair to say that the positives associated with KC's narrower-than-expected losses have been factored into the stock's price performance and valuation multiple to a large degree. At the same time, Kingsoft Cloud hasn't provided a clear timeline for the company to deliver positive EBITDA, while the sell side thinks that KC's operating profitability inflection point will only happen more than a year later.
I choose to leave my existing Hold rating for Kingsoft Cloud unchanged. KC's Q4 2023 results were above expectations, but its stock price had already gone up significantly in response to its narrower-than-expected losses for the fourth quarter. The company didn't guide for a specific EBITDA breakeven timeline, while the analysts expect KC to generate positive quarterly EBITDA in the first quarter of next year. As such, I think it is premature to turn bullish on Kingsoft Cloud now.