Kuaishou's AI Ambitions Face a Reality Check from Slowing Core Businesses

Kuaishou Technology is navigating a critical juncture where its surging generative AI business is struggling to outshine the growing headwinds facing its legacy online marketing and live-streaming operations, creating a valuation puzzle for investors.

The Chinese short-video giant on Monday reported fourth-quarter 2025 results that beat analysts' profit estimates, propelled by stringent operational efficiencies. The company’s core operating margin expanded to 13.5%, a 3.5 percentage-point increase from a year earlier. This efficiency, however, masks a fundamental slowdown in its traditional revenue pillars and near-stagnant user growth, with monthly active users hovering at 740 million.

Investor sentiment has remained cautious, with Kuaishou's stock retreating since February 2026. The market appears to be pricing in the deceleration of core operations and remains skeptical whether the high-growth AI segment can single-handedly justify a re-rating, especially as AI-related costs begin to weigh on the bottom line.

Kling AI Misses High Bar But Signals Stronger 2026

Kuaishou’s flagship generative AI model, Kling, delivered RMB 340 million (US$47.2 million) in revenue for the fourth quarter, landing at the lower end of revised analyst expectations. This performance, coupled with a slowdown in iOS-based data in January, fueled investor concerns over rising competition from rivals like ByteDance’s Seedance 2.0.

However, on its earnings call, management provided a significantly more bullish outlook. The company disclosed that Kling’s annual recurring revenue (ARR) surpassed US$300 million in January 2026, a 25% jump from December 2025. It projects Kling’s revenue will at least double in 2026 to over RMB 2.1 billion. The discrepancy suggests that third-party data, which primarily tracks consumer app spending, is failing to capture Kling's accelerating growth in the PC-based business-to-business (B2B) segment, which now accounts for a substantial portion of its revenue.

Legacy Operations Show Signs of Fatigue

While the AI narrative gathers steam, Kuaishou's foundational businesses are showing clear signs of maturation.

• Advertising: Online marketing services revenue grew 15% year-on-year, a slight beat driven by low-base effects from 2024 and improved monetization from its AI-powered ad-serving models like OneRec and UAX. However, potential regulatory impacts, such as a "traffic tax," cast a shadow over future growth.
• E-commerce: Gross merchandise value (GMV) rose 13% in the fourth quarter, a deceleration from the previous period. For the full year 2025, GMV approached RMB 1.6 trillion (US$222 billion).
• Live-streaming: This segment remains the weakest link, with revenue from paid users declining 2% year-on-year, reflecting an industry-wide contraction and Kuaishou's internal adjustments to foster a "healthier ecosystem."

AI Investments Threaten Profitability Gains

Kuaishou’s recent margin improvement came from reining in operational spending, with employee costs rising a modest 4% and marketing expenses held flat year-on-year. This discipline is set to be tested by an aggressive ramp-up in AI investment.

Research and development expenses jumped 34% in the fourth quarter, while server depreciation costs rose 10%, both linked to the build-out of its AI infrastructure. The company explicitly guided that these investments will erode profit margins in 2026, forcing investors to bet that the long-term payoff from AI will be worth the near-term margin sacrifice.

Investors Weigh AI Premium Against Legacy Discount

For investors, Kuaishou presents a classic valuation dilemma. Analysis suggests its current market capitalization attributes an approximate 11x price-to-earnings multiple to its traditional businesses, a valuation typical for mature internet platforms. This implies Kling's high-growth potential is not yet fully priced in by the market.

While the company has enhanced shareholder returns—with HK 3.2 billion in buybacks and a newly announced HK3.0 billion dividend for 2025—the central question remains. Kuaishou's ability to sustain a valuation re-rating hinges entirely on whether Kling can consistently deliver explosive growth to compensate for the inevitable slowdown of its multi-billion dollar legacy empire.

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