On Friday, UBS analyst Wendy Zhan revised the rating for Kingsoft Cloud (NASDAQ: KC), lifting the stock from Neutral to Buy and significantly increasing the price target to $12.50, up from the previous $4.20. The stock has shown remarkable momentum, with InvestingPro data showing a 136% year-to-date return and currently trading near its 52-week high of $9.46.
The upgrade follows a strong performance in the third quarter, which the analyst believes has heightened investor expectations for the company's ongoing revenue and margin recovery. With a market capitalization of $2.06 billion and a Financial Health score of "FAIR" according to InvestingPro, the recovery is supported by advancements in artificial intelligence (AI) and the backing of Kingsoft's ecosystem.
According to the analyst, the growing use of cloud services, particularly for AI-related applications in WPS Office, Xiaomi (OTC:XIACF) IoT, smartphones, and electric vehicles, is expected to boost Kingsoft Corp and Xiaomi's revenue contribution to Kingsoft Cloud. Projections suggest this contribution will rise from approximately 20% in 2024 to over 40% by 2027. This increase is anticipated to drive a compound annual growth rate (CAGR) of 13% in revenue from 2025 to 2027, a significant improvement from the -5% CAGR estimated for the period from 2021 to 2024.
Investor concerns regarding Kingsoft Cloud's cash flow and its ability to sustain capital expenditures have been addressed by Xiaomi's proposed financial backing. This support is intended to cover the company's annual costs of 2 to 3 billion RMB for AI servers and related services during the 2025-27 period.
In light of these developments, UBS has raised its revenue forecast for Kingsoft Cloud for the years 2024 to 2026. Despite a year-to-date price rally of over 100%, Kingsoft Cloud shares are still trading at a discount compared to their independent cloud peers in China, with a price-to-book ratio of 2.85.
According to InvestingPro analysis, the stock appears to be fairly valued at current levels, with 16 additional ProTips available to subscribers. The UBS analyst suggests that the current market valuation does not fully recognize the potential opportunities presented by Kingsoft's involvement in the AI sector.
In other recent news, Kingsoft Cloud's third-quarter earnings report showed revenues matching market expectations and an adjusted EBITDA surpassing forecasts. The report highlighted a significant contribution from AI cloud services, accounting for 31% of the company's public cloud revenue. This rapidly growing segment offers higher margins compared to other business areas.
Jefferies maintained a Buy rating on Kingsoft Cloud shares and increased the price target, citing the company's AI growth. The firm expressed a positive outlook on Kingsoft Cloud's future, expecting the company to capitalize on the growing AI narrative.
Kingsoft Corporation Limited's third-quarter results exceeded analyst expectations with revenue and earnings surpassing estimates. The revenue for the quarter was RMB2.91 billion ($405 million), a 42% YoY increase, and an 18% sequential rise. The company also reported an adjusted loss per share of RMB0.22, notably less than the projected RMB1.07 per share loss.
The primary growth driver was online games and other services, with revenue surging 78% YoY to RMB1.71 billion. Kingsoft anticipates accelerated growth in total revenues for the fourth quarter, driven by its public and enterprise cloud businesses, and expects further improvement in profitability.
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