Against the backdrop of pressure on Kuaishou's core operations, its AI video generation product, Kling, has significantly outperformed expectations, fueling market optimism and prompting a shift in Wall Street's valuation approach for the company.

The first-quarter 2026 results revealed that Kling's AI revenue reached 6.5 billion yuan, marking a year-over-year increase exceeding 300%. This figure substantially surpassed the management's previous guidance of 3 billion yuan. By the end of March, its annualized recurring revenue (ARR) had approached $500 million.

Management disclosed that approximately 75% of Kling's revenue originates from overseas markets. Regarding its payment structure, API-based revenue and subscription revenue contribute in a roughly 60:40 ratio.

According to market analysis, Morgan Stanley has revised its forecast for Kling's ARR by the end of 2026 upward from $840 million to $1 billion.

However, Kling's stellar performance cannot fully mask the weakness in the core business. Kuaishou's total revenue for the quarter grew only 3.4% year-over-year. Live streaming revenue declined by approximately 13%, while adjusted net profit decreased by 26%.

On one side is the main platform encompassing short videos, e-commerce, and advertising, which is experiencing slowing growth and requires continued investment and concessions to maintain its ecosystem. On the other side is Kling AI, which is rapidly scaling revenue and presents potential for independent financing or a spin-off.

This divergence explains the split in analyst views following the earnings release. Optimists are inclined to assign a higher valuation weight to Kling, viewing AI video generation as Kuaishou's most significant current opportunity. More cautious analysts focus on the deceleration in core business growth and the pressure on profits and cash flow from increased AI-related investments.

Kuaishou's stock currently trades at HK$45.5. Morgan Stanley maintains an Overweight rating, Citigroup retains a Buy rating, while J.P. Morgan holds a Neutral rating. Kuaishou's Hong Kong-listed shares have declined over 30% year-to-date.

**Core Business Faces Multi-Faceted Pressure, Growth Momentum Weakens**

Kuaishou's total Q1 revenue was 33.716 billion yuan, a 3.4% year-over-year increase, slightly above market expectations. By segment: * Live streaming revenue was 8.492 billion yuan, down about 13%. * Online marketing services revenue was 19.643 billion yuan, up approximately 9%. * Other services revenue was 5.581 billion yuan, growing about 16%, with Kling contributing significantly.

On the profit front, non-IFRS net profit was 3.374 billion yuan, down 26% year-over-year but about 10% higher than market expectations. The adjusted net profit margin was 10%, down about 4 percentage points from the same period last year.

Analysis suggests the main business is under clear pressure from slowing growth and declining gross margins. The Q1 gross margin was 51.2%, down 3.4 percentage points year-over-year and also declining from the previous quarter. This is attributed to changes in revenue mix and rising costs related to AI, such as computing power, bandwidth, and data center depreciation.

In essence, Kuaishou is in a typical phase of "new business high growth, old business structural adjustment." Kling provides new imagination for revenue and valuation, but the main platform still requires subsidies, low commission rates, and merchant support to stabilize its ecosystem, which weighs on short-term profitability.

**Kling is the Biggest Bright Spot, Transitioning from "Story" to "Revenue Stream"**

Kling's better-than-expected Q1 performance stemmed from both user base expansion and an increase in average revenue per paying user (ARPPU).

According to a Morgan Stanley report, Kling's development focus is on professional user needs, with recent versions further enhancing multi-modal input/output, long-context processing, and image quality.

In terms of user retention, performance in overseas markets is notably better than in China, with retention rates approximately 10 percentage points higher.

Regarding revenue structure, management indicated the overseas-to-domestic revenue split is roughly 75:25, highlighting Kling's global penetration in professional creative fields.

A J.P. Morgan report noted that Kling AI's ARR reached $300 million in January and rose to $500 million by March, demonstrating a non-linear growth trajectory.

A Citigroup report added that Kling's revenue growth is driven by strong demand from professional creative scenarios like advertising, film/TV, and gaming, with full-year revenue expected to potentially exceed $500 million.

On the product front, management stated that Kling demonstrates higher accuracy in video generation when processing longer prompts, constituting a core differentiator against competitors. Kuaishou also revealed that Kling AI was deeply involved in the production of a popular Chinese historical drama and contributed to virtual scenes and visual effects for a Hollywood television series.

**Valuation Divergence: Kling's Worth Determines Kuaishou's Worth**

Kling's rapid growth is altering Wall Street's valuation framework for Kuaishou.

The core market debate is whether to view Kuaishou as a low-multiple internet platform or as a company possessing a valuable AI video generation asset.

Morgan Stanley employs a sum-of-the-parts (SOTP) valuation, applying an 8x multiple to the 2026 forecasted earnings for the core business. For Kling, it applies a 20x multiple to its ARR, incorporating a 30% holding company discount.

Citigroup presents a more optimistic valuation, applying a 10x multiple to 2027 earnings for the core business and a 25x multiple to Kling's 2027 revenue.

Citigroup's report suggests that while Kling holds significant valuation upside potential, pressure on the core e-commerce business persists. It views the current valuation level as attractive, citing Kling's upcoming version upgrade (potentially around its June 6 anniversary) and progress on external financing as key catalysts for market focus.

J.P. Morgan maintains a more cautious stance with a Neutral rating. The firm notes that factors including e-commerce regulatory impacts, subdued consumer sentiment, and significant capital expenditure increases are expected to slow the core business revenue growth (excluding Kling) from 12% in 2025 to 3% for 2026-2027. It sees no clear catalyst for a rating upgrade at present.

This divergence is not surprising. For traditional internet businesses, the market focuses on revenue growth, profit margins, and cash flow. For AI applications, the market often prioritizes metrics like ARR, user retention, overseas paid user base, model capabilities, and comparable capital market valuations.

Any move towards external financing, an independent valuation, or a potential spin-off for Kling would likely re-anchor Kuaishou's valuation framework. Morgan Stanley explicitly stated in its report that Kling's potential spin-off is a key argument supporting its Overweight rating, believing it could unlock significant value reassessment.

**Broader Implications of Kuaishou's Earnings: Platform Economy Enters "Efficiency and New Tech for Growth" Phase**

Kuaishou's earnings report also holds broader industry significance.

The dominant theme for domestic internet platforms has shifted from "traffic expansion" to "improving efficiency within existing user bases."

While user time spent on short videos remains resilient, incremental traffic红利 is limited. Advertising, e-commerce, and live streaming now operate within a more mature competitive landscape.

For platforms to sustain growth, they must rely on algorithms and AI to enhance advertising efficiency while maintaining transaction scale through subsidies and ecosystem development.

Simultaneously, the consumer environment impacts monetization pace. Merchants are more focused on return on investment (ROI), and user consumption is becoming more rational, forcing platforms to constantly balance between raising commission rates and expanding subsidies.

Put more mildly, the current consumer and merchant operating environment is still in a recovery phase, and the growth elasticity for internet platforms is not as robust as in previous years.

However, Kuaishou's distinction lies in having successfully developed a new business with tangible revenue, overseas demand, and capitalization potential. Kling is transforming Kuaishou from being merely the "second player in short video" and a "live streaming e-commerce platform" to beginning to exhibit characteristics of an AI-native application company.