Source | Bohu Finance and Economics (bohuFN)

For a long time, Kuaishou's image has not been particularly good. In business narratives, its performance includes but is not limited to idealism, losses, sharp declines in share prices, and more, often playing the role of a backdrop to ByteDance.

On some social platforms, there is also a great deal of misunderstanding towards Kuaishou.

The video titled "The Hardest Challenge on the Internet: Watch These Kuaishou Videos in Full, and You'll Be the Strongest Warrior" uploaded by Bilibili user Ayin Ooho has garnered 3.187 million views and 395,000 comments, most of which express their "intolerance." On Zhihu, when searching for Kuaishou, the latest discussions often center around why people dislike the app. On Xiaohongshu, most complaints focus on its "juvenile" content and the inability to understand its existence. When searching on Weibo, "violations by live streamers" and "complaints" dominate the results.

Yet despite the harsh criticism, Kuaishou has amassed nearly 400 million users.

In 2023, Kuaishou's annual e-commerce GMV reached 1.18 trillion yuan, making it the fifth e-commerce platform to enter the "trillion club" after Taobao, JD.com, Pinduoduo, and Douyin.

After years of battling losses, Kuaishou finally achieved profitability for six consecutive quarters from 2023 to the first half of this year.

01 Why is Kuaishou profitable?

On August 20th, Kuaishou released its financial results for the first half of 2024.

The company generated revenue of 60.38 billion yuan in the first half of the year, a year-on-year increase of 14%; gross profit was 33.255 billion yuan, up 29.7% year-on-year; and adjusted net profit was 9.07 billion yuan, up 231.4% year-on-year.

Where does this profitability come from? Primarily from its e-commerce operations.

Nowadays, almost every app with some traffic wants to venture into e-commerce, as evidenced by Alibaba and Pinduoduo. E-commerce primarily generates two sources of income: transaction commissions and e-commerce advertising.

And this e-commerce advertising is incredibly lucrative. According to the "2020 China Internet Advertising Data Report," China's internet advertising revenue reached 497.161 billion yuan in 2020. As an e-commerce giant, Alibaba's advertising revenue amounted to 253.6 billion yuan, accounting for over 50% of the total.

Looking at Pinduoduo, in the first quarter of this year, it generated 42.5 billion yuan solely from advertising (excluding commissions), accounting for 49% of its total revenue.

Kuaishou has also tasted this sweetness. In the first half of the year, online marketing services generated 17.52 billion yuan, contributing 56.5% to total revenue.

Kuaishou divides its advertising business into two parts: external and internal circulation. External circulation refers to branded and performance advertising from across the entire domain, while internal circulation involves advertising placements by merchants and live streamers on the platform to gain more exposure.

However, external circulation advertising relies heavily on advertisers, making it susceptible to market conditions. Coupled with Kuaishou's inherent tone, advertisers tend to underestimate the value of the platform's user base, making it difficult to increase revenue from external circulation advertising.

Internal circulation advertising, on the other hand, is highly beneficial for Kuaishou.

Firstly, e-commerce is inherently a volume-driven industry that can self-sustain. A notable example is that while advertisers tightened their belts in 2022, with internet advertising growing by just 1.4%, Kuaishou's advertising grew by 14.94% year-on-year, outpacing the market.

Secondly, with hundreds of millions of daily active users, it's a walking traffic pool.

But to rely on internal circulation advertising, which is essentially doing business with oneself, Kuaishou needs to bolster its e-commerce capabilities.

02 Boosting E-commerce

Kuaishou has two excellent role models to learn from in e-commerce: Douyin and Pinduoduo.

When it comes to traffic, Kuaishou has limited the flow to top live streamers like Xinba and vigorously supported small and medium-sized live streamers. Xinba's GMV contribution has dropped from 25% in the past to less than 5% in 2022, giving Kuaishou more control. On the product side, Kuaishou has encouraged branded store broadcasts while supporting "fast brands" from white-label factories.

Furthermore, in the second quarter of 2023, Kuaishou launched "Site-wide Promotion.""Pinduoduo's core user base comprises small and medium-sized merchants who lack brand endorsement and struggle to obtain free traffic. Additionally, their low-priced products leave little room for promotion expenses. Coincidentally, Kuaishou's e-commerce shares these characteristics. Site-wide promotion is ideally suited for these merchants, allowing them to quickly scale up without barriers. Merchants can set daily budgets and calculate the break-even ratio to initiate campaigns.

By the end of 2023, internal circulation advertising accounted for 60% of Kuaishou's advertising revenue. The once-loss-making giant achieved profitability throughout 2023.

Moreover, according to the financial report, in the second quarter, the total consumption of Kuaishou's site-wide promotion solutions or smart trusteeship products for marketing promotion accounted for 40% of the total internal circulation marketing consumption. The consumption of automated marketing solutions targeting small and medium-sized merchants surged 60% year-on-year in the second quarter of 2024.

In other words, more people are willing to spend money on Kuaishou.

However, it cannot be ignored that other services (including e-commerce) only contribute 13.5% to Kuaishou's main business revenue.

Amidst fierce competition in the e-commerce industry, Kuaishou's e-commerce growth has begun to slow. In the second quarter, Kuaishou's e-commerce GMV reached 305.3 billion yuan, up 15% year-on-year. For comparison, in the second quarters of 2022 and 2023, Kuaishou's e-commerce GMV was 191.2 billion yuan and 265.5 billion yuan, respectively, up 31.5% and 38.9% year-on-year.

Meanwhile, Kuaishou has maintained a sales rate of around 30% for over a year, while other mature platforms have sales rates of 10%-20%. Despite this high sales rate, Kuaishou's daily active users have increased by 5.6% from 374 million to 395 million since 2023.

This has inevitably raised questions in the market about Kuaishou's potential growth ceiling and the stickiness of its private domain. It's no surprise that despite multiple core financial performance improvements in the second-quarter report, the share price fell 9.91% on the first day of its release.

In response, while maintaining stable operations in live e-commerce, Kuaishou has expanded e-commerce transactions into general shelf scenarios and short video fields.

Last year, Kuaishou introduced a general shelf strategy to focus on general shelf scenarios. In the second quarter of this year, Kuaishou's general shelf GMV accounted for over 25% of its total, with search GMV increasing by over 80% year-on-year.

Cheng Yixiao stated at this year's Gravity Conference that the core of the general shelf is to have products always available, meeting consumer needs 24/7 without relying on live streaming hours. The significance of the general shelf lies in fostering a habit of shopping on short video platforms, even making them the "main battlefield" for consumption, as Douyin has explored for Kuaishou.

Simultaneously, Kuaishou is also strengthening its operations. In the second quarter, Kuaishou e-commerce vigorously promoted the cold start and growth of new merchants, especially small and medium-sized ones. On one hand, it empowered them with traffic to quickly expand their business scale from their initial live streams. On the other hand, it lowered their operational barriers through innovative sales trusteeship and other business models.

Beyond e-commerce, Kuaishou is also exploring new possibilities.

03 Seeking New Growth

Kuaishou has proven that it and short video platforms can sustain profitability, leaving room for more endeavors, such as short dramas, local life services, and AI exploration.

Currently, Kuaishou's short dramas and local life services are still in the stage of driving growth in its advertising business.

Kuaishou was one of the earliest platforms to layout short dramas, and its daily active users for short dramas have surpassed 300 million. According to reports, the daily average marketing consumption of paid short dramas on Kuaishou in the second quarter increased more than twofold year-on-year, accounting for a high single-digit percentage of external circulation marketing revenue. Kuaishou has also partnered with local life service providers, but it's still in the early stages of revealing growth multiples, and time will tell how successful it will be.

Kuaishou's exploration in AI has also attracted much attention and is one of the highlights of this quarter's financial report.

Kuaishou's core AI products include the language model Kuaiyi, the video generation model Keling AI, and the image generation model Ketu.

However, unlike Doubao, which showcases strong competitiveness externally, the Kuaiyi model is primarily used internally by Kuaishou to support its short videos, live streams, advertising, and e-commerce operations. According to the financial report, nearly 20,000 merchants optimized their operations with the help of Kuaishou's AI matrix in the first half of this year. In the e-commerce sector, search GMV increased by over 80% year-on-year with the support of the large model.

Similarly, since its launch, Keling AI has enabled over one million users to generate over ten million videos, marking a significant step forward for Kuaishou's AI ecosystem. In June, the daily peak consumption of AIGC marketing materials reached 20 million yuan. However, Kuaishou currently has no clear business plan and does not provide APIs externally.

In fact, amidst the AIGC boom, most enterprises have made layouts that strongly support their internal operations, genuinely enhancing quality and efficiency. However, who will seize this AI wave remains uncertain.

Whether it's short dramas, local life services, or AI exploration, Kuaishou is seeking new opportunities for itself. These cross-sector endeavors all rely on a vast and stable user base. After all, a short video platform with nearly 400 million daily active users cannot be ignored by brands and merchants.

Reference Sources:

1. Yuanchuan Research Institute: Kuaishou is the passing grade for internet companies

2. Business Data School: Profitable by 4.7 billion yuan, but Kuaishou's sense of crisis remains

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