As mentioned before, Kuaishou makes the majority of its money through live streaming, virtual gifts, advertising and e-commerce. With streaming, users can broadcast their gameplay to a live audience and receive virtual gifts from viewers in return (earnings category: livestreaming).
The app also has a separate games tab, allowing people to download mobile games from third parties, which in turn gives Kuaishou a share of in-app purchase revenue.
Advertising revenue is derived from its separate advertising platform and to a lesser extent from its short-video ads. It has unique data over its users, which the company puts to work by allowing merchants to target customers by segment. Revenue from this segment rose 194.6% in 2020 to ~3.2 bln (earnings category: online marketing services).
Gathering a lot of user data and using this for marketing purposes is exactly what Alibaba does with its Alimama “Ad Tech” platform. Note that for Alibaba, this advertising platform accounts for 60% of Alibaba’s total revenue. We see Kuaishou’s marketing platform as the core enabler in its path to becoming profitable in the near future.
On the ecommerce side, influencers take to Kuaishou to host live events where they promote products. Kuaishou also receives commission on ecommerce items sold through its platform. Merchants can either sell directly through Kuaishou or through third-party integrations with partners such as JD.com. Kuaishou has also partnered with Alibaba in the past, as when the companies together generated 2.1 billion yuan ($324 million) in sales from Singles’ Day 2019 (Protocol, 2021). This commission revenue falls under the “Other services revenue” category. Let’s have a look at the financial performance.
The financial disclosures from previous years show that Kuaishou hasn’t posted an annual profit since 2017, though it has managed to almost double its revenue through 2017 and 2019.
Note that the bulk of its revenue is derived from livestreaming, which shows Kuaishou’s dependence on this segment. It managed to reduce its dependence on this segment in the second half of the year. In the fourth quarter, revenue from marketing services even surpassed revenue from the live streaming business. It is worth noting that its costs related to SG&A are over 50% of its revenue, which indicates the companies’ aggressive focus on customer acquisition.
Douyin, on the other hand, pulled in about 67% of its revenues from advertising last year while live streaming only made up 17%, according to a source cited by Technode (Techcrunch, 2020).
The revenue distribution reflects the core use case of both apps. Kuaishou often prides itself on user engagement; indeed, over a quarter of its 776 million monthly users are creators themselves. That makes Kuaishou more of a social app, where the viewers and creators interact frequently through means like live streaming and gifting (Techcrunch, 2020).
On reporting its full-year results on March 23rd of 2021, the share price sank 12% as a result of the performance in the live streaming segment. Analysts were expecting a positive surprise, which the company couldn’t deliver. We’ve covered the financial results, let’s now take a look at the stock valuation metrics.
We further note the company incurred around 2.1 bln USD in selling & marketing costs in the first 6 months of 2020, an increase of over 350% year-on-year. It went on an aggressive marketing campaign, successfully attracting more users. However, increased costs resulted in losses of over 10bln USD in the first half of 2020, a figure larger than the last three years combined. Behind these losses lie Kuaishou’s efforts to diversify its revenue sources beyond livestreaming.
Let’s have a look at what the current price means in terms of valuation, and whether or not the stock is reasonably priced at current levels. As usual, we provide a comparison between the company and its peers. ByteDance, its main competitor, is currently not publicly traded. As a result, we added the Chinese video-sharing platform Bilibili and the well-known Snapchat to the table.
It’s rather hard to judge on the valuation of the company, as both its EBITDA and Net Income are still negative. We note that from a price-to-sales perspective, Kuaishou is quite expensive with a P/S of over 15 but this is lower than its above competitors in both China and the U.S.
However, as the company increased its sales by 50% over the course of last year, the current number doesn’t reflect the sales growth potential. We can use an alternative metric corrected for growth, in line with the PEG (Price-earnings growth) ratio but discounting sales instead of earnings.
That leaves the question which growth rates to use. Let’s draft some scenario’s based on low, medium and high growth rates.
As you can see, a price to sales (corrected for any growth) of 15,3 is acceptable if the company keeps growing at its current rate. Less so should it only grow 10% (as the P/S Growth ratio would be more than one, indicating the price might be too high).
We can see that the growth rate is critical in coming up with a valuation metric. To better understand the implications of a 15,3 P/S, consider the following elements
- The current P/S ratio of the combined Nasdaq stocks equals 4.58 (April, 2021)
- The current P/S ratio of Netflix [NASDAQ:NFLX], for example, equals 8.4. However, Netflix is only growing revenue at a rate of around 25%.
- The current P/S ratio of Snapchat Inc. [NYSE: SNAP] equals 39,9, with earnings growing over 45 % for three consecutive years
Now this puts things in a much better perspective. The initially considered expensive “Kuaishou” becomes reasonably priced relative to the valuation of Snapshot Inc. Ofcourse, it ultimately depends to which extent a company is able to convert these sales into profits.
It’s worth noting that ByteDance, while surpassing Kuaishou in terms of DAU, has an expected market value of 400 bln USD, according to sources cited by the South China Morning Post (SCMP, 2021).