Kuaishou, a company that has accumulated losses exceeding RMB 200 billion since its 2021 IPO and landed on Fortune's list of major loss-making companies, turned a profit in 2023 and finally started to thrive.

On August 20, Kuaishou released its Q2 2024 financial report, showing a revenue of RMB 30.975 billion, up 11.65% YoY, and an adjusted net profit of RMB 4.679 billion, up 73.68% YoY.

Since turning profitable, Kuaishou has achieved stable profit growth for five consecutive quarters. Paradoxically, however, Kuaishou's share price plunged by over 10% after the financial report was released the following day.

In fact, such uncertainty and mistrust from the capital market is not new: investors voted with their feet after Kuaishou's previous quarter's financial report was released.

While short-term share price fluctuations may be accidental, Kuaishou's market value has shrunk from RMB 1.4 trillion since its 2021 Hong Kong IPO to less than RMB 200 billion today.

Is the market simply too sensitive?

When the Cement Starts to Set

Having navigated through the tumultuous world of live streamers and criticisms surrounding its penetration into lower-tier markets, Kuaishou has now emerged as a short video platform with a mature business model, offering services such as online advertising and marketing, live streaming tips, and e-commerce sales.

However, there is significant divergence in the market's perception of Kuaishou's growth potential.

Although Kuaishou achieved an adjusted net profit of RMB 4.68 billion in Q2, as a traffic-driven company, its daily active users (DAU), monthly active users (MAU), and average daily usage time are crucial indicators for assessing its growth potential. Traffic is undoubtedly the lifeblood of Kuaishou's vitality.

Kuaishou's Q2 2024 financial report revealed that the platform had an average DAU of 395 million and an average MAU of 692 million, representing YoY growth rates of 5.1% and 2.7%, respectively, with an average daily usage time of 122 minutes per DAU.

When viewed over a longer timeframe, Kuaishou's DAU and MAU growth has stagnated. Over the past six quarters, from Q1 2023 to Q2 2024, Kuaishou's DAU fluctuated between 374 million and 395 million, indicating a slow and gradual peaking trend.

Notably, Kuaishou did not specify in its Q2 report how many of its user growth came from domestic and overseas markets.

Furthermore, Kuaishou's MAU in Q2 remained at 692 million, a sequential decrease of 5 million and weaker than market expectations. The market had hoped that Kuaishou, with its highly engaged user base, would gradually reduce customer acquisition costs or improve efficiency, but its sales and marketing expenses still amounted to RMB 10 billion in Q2, increasing its share of total revenue from 31.9% in Q1 2024 to 32.4% in Q2 2024.

This means that Kuaishou's current marketing expense ratio exceeds 30%, significantly higher than the 10% to 20% range of other platforms.

Moreover, despite having China's most loyal user base, Kuaishou's average daily usage time remained at 122 minutes in Q2. This core metric of user engagement has hovered between 120 and 130 minutes in 2023, suggesting that user engagement may have peaked as well.

Data shows that in 2023, Kuaishou had an average DAU of 379.9 million and an average MAU of 678.2 million. In contrast, Douyin (the Chinese version of TikTok) surpassed 700 million DAU in 2024, a significant gap compared to Kuaishou's MAU.

While users still spend two hours per day on Kuaishou, the platform is undoubtedly transitioning from a traffic-growth model.

This challenge is also evident in Kuaishou's live streaming business, a cornerstone of its revenue and profit streams.

Kuaishou's Q2 financial report revealed a 6.7% YoY decline in live streaming revenue to RMB 9.302 billion, reducing its share of total revenue to 30.0%. This decline underscores the erosion of Kuaishou's once-dominant live streaming segment.

Before shifting its focus to e-commerce, live streaming was Kuaishou's primary cash cow. At that time, Kuaishou earned commissions from livestreamers' tips, but as the live streaming business contracted, those easy days are gone.

Kuaishou attributed the decline to its commitment to fostering a healthy live streaming ecosystem.

Are Kuaishou's loyal users losing interest in live streaming?

In 2023, investment guru Charlie Munger reflected on some of his investment misjudgments, saying, "When considering investing in Alibaba, I was captivated by its leading position in China's internet industry, but I failed to realize that it was, after all, just another damn retailer. Retail, even online, is a fiercely competitive industry, and doing business there is not as easy as taking a slice of cake."

Over the years, China's e-commerce sector has been fiercely competitive, with platforms like Pinduoduo, Douyin, and Kuaishou eroding Tmall's market share.

In this battle for supremacy, the forces of commercial competition are reciprocal. After rapidly growing from RMB 96 million in 2018 to RMB 1.18 trillion in 2023, Kuaishou's e-commerce GMV became the fifth e-commerce retail platform to surpass the trillion-yuan mark, following Taobao, JD.com, Pinduoduo, and Douyin.

Kuaishou's GMV growth began to slow in Q2 2024, with a mere 15% YoY increase to RMB 305.3 billion. This represents a significant slowdown from the nearly 30% growth in Q1, putting Kuaishou's annual GMV target of 25% to 30% growth at risk.

Especially considering that Kuaishou's 618 sales event in 2024 lasted a record 42 days, longer than Tmall's 33 days, Xiaohongshu's 30 days, and JD.com's mere 21 days. Despite this extended promotion period, Kuaishou failed to deliver impressive growth.

Moreover, during the 618 promotion, the combined GMV growth of Pinduoduo, Tmall, and JD.com was 11.2%, while that of Douyin and Kuaishou was 24.3%. Given that the combined sales of Pinduoduo, Tmall, and JD.com dwarf those of Douyin and Kuaishou, this suggests that Kuaishou's catch-up speed is slowing.

In fact, Kuaishou's e-commerce GMV growth has been slowing for years.

From 2018 to 2023, Kuaishou's annual e-commerce GMV increased from RMB 96.6 million to RMB 1.1844 trillion. However, Kuaishou has consistently lagged behind Tmall, JD.com, Douyin, and Pinduoduo in terms of GMV, and its growth rate has gradually slowed, trailing even Pinduoduo and Douyin, which are significantly larger.

As a long-standing rival, Douyin's 2023 GMV reached RMB 2.2 trillion, almost double that of Kuaishou. In Q2 2024, Douyin's GMV reached RMB 760 to 770 billion, with the platform's total GMV exceeding RMB 1.4 trillion in the first half of the year, more than double that of Kuaishou, widening the gap further.

Apart from Douyin, Kuaishou still lags significantly behind top platforms like Tmall and Pinduoduo. In 2023, Kuaishou's GMV was RMB 1.18 trillion, while Alibaba's was RMB 7.2 trillion and Pinduoduo's was RMB 4.05 trillion.

The slowdown in GMV growth poses a sustained challenge for Kuaishou, which is increasingly reliant on e-commerce for its advertising, live streaming, and commission revenue. This also adversely affects how the capital market assesses Kuaishou's growth potential and true valuation amidst the competitive e-commerce landscape.

As Kuaishou's GMV growth slows, so does its e-commerce revenue growth. For instance, Kuaishou's other service revenue (including e-commerce) decreased slightly from RMB 4.18 billion in Q1 2024 to RMB 4.15 billion in Q2, despite the 618 sales event. This indicates that Kuaishou's GMV and e-commerce revenue growth during the promotion period were not significantly higher than during non-promotional periods.

As a result, Kuaishou's other service revenue contribution decreased to 13.5% in Q2.

Given Kuaishou's dual slowdown in GMV and e-commerce revenue growth, the company is likely to focus on enhancing traffic utilization, such as increasing the proportion of advertising in both internal and external loops. However, a notable increase in Kuaishou's advertising or a rise in advertising costs could compromise user experience or increase merchants' operating costs, posing a significant challenge to Kuaishou's commercialization strategy.

Amid these factors, Kuaishou's Hong Kong-listed shares fell 9.91% to close at RMB 40.00 per share on August 21, with its market value continuing to decline.

Kuaishou's Transformation Requires Patience

As its total traffic nears its peak, Kuaishou has continuously undertaken business transformations to sustain high growth rates.

In 2018, after shifting its focus to e-commerce, Kuaishou introduced features like "Xiaohuangche" (lit. "Little Yellow Car") and Kuaishou Xiaodian (Kuaishou Stores) and began supporting mid-tier livestreamers, gradually overcoming its reliance on top livestreamers like Xinba and strengthening its platform dominance.

After Kuaishou's e-commerce GMV surpassed RMB 1 trillion for the first time in 2023, the Xinba family's contribution to Kuaishou's GMV gradually decreased, from nearly one-third of the platform's total GMV in 2019 to just 5.5% in 2022, when Kuaishou's annual GMV reached RMB 901.2 billion and the Xinba family accounted for approximately RMB 50 billion.

In 2023, when Kuaishou's e-commerce GMV surpassed RMB 1 trillion for the first time, its e-commerce and advertising businesses significantly grew, contributing over 60% to annual revenue and helping Kuaishou turn a profit with billions in earnings.

Kuaishou has transformed from a traffic-driven to an operation-driven company in recent years, with its monetization capabilities continuously improving. This transformation is attributed to CEO Cheng Yixiao's comprehensive reforms since fully taking charge of Kuaishou in 2021.

In May 2023, CEO Cheng Yixiao, who also served as the head of e-commerce at the time, stated, "E-commerce is an essential growth engine for Kuaishou's future and the centerpiece of our entire business ecosystem." This statement implies that if Kuaishou's revenue falls short of expectations, its future prospects may be clouded.

Currently, as Kuaishou moves away from its reliance on live streaming e-commerce, its general merchandise e-commerce has emerged as another growth engine for the company's dual-wheel e-commerce strategy.

During Kuaishou's Q1 2024 earnings call, CEO Cheng Yixiao remarked, "Kuaishou's e-commerce business is still in a stage of rapid development, with the general merchandise e-commerce segment, as one of the engines driving growth, achieving over 50% YoY growth in Q1 2024."

In Q2, Kuaishou's general merchandise e-commerce segment continued to grow, outpacing the overall GMV growth and accounting for over 25% of total GMV.

However, as Cheng Yixiao delegates more authority and shifts his focus beyond e-commerce, Kuaishou, once relentlessly focused on building its e-commerce ecosystem, seems to be slowing down during this critical transition period where mistakes cannot be afforded. In reality, as Kuaishou's user growth and engagement decline, and its high-growth e-commerce segment struggles to sustain momentum, internal and external loops, along with commission-based initiatives, are crucial for Kuaishou to stabilize its core business and maintain profitability.

As the shadow of Kuaishou's total traffic peaking looms larger, any shake-up in its core business could erode its financial performance, feeding into the capital market's concerns and uncertainties that may not dissipate overnight.

Kuaishou may still be in the midst of a protracted adjustment period.