Shares of Kuaishou Technology tumbled in Hong Kong after the short-video app operator reported a decline in quarterly earnings, deepening investor concern over the company's outlook as it faces stiff competition in the artificial intelligence business.

Kuaishou on Wednesday reported that its second-quarter net profit plunged 36% from a year earlier, while revenue edged just 1.4% higher. The firm attributed the lower earnings to an increase in revenue sharing costs and investment in its AI video generator business, Kling.

Shares fell as much as 12% in early Thursday trading, marking their lowest level since October 2022, and were last down 11%.

Kuaishou has doubled down on AI investments to capitalize on the global AI boom. However, the short-video platform is facing intensifying competition from well-capitalized rivals such as ByteDance, the tech giant behind TikTok, its sister app Douyin and AI video model Seedance, which launched its latest version in July.

According to Morningstar director Ivan Su, competitors such as ByteDance can easily outspend Kuaishou on AI investments, posing a formidable challenge to Kling's growth prospects.

Despite the sharp decline in earnings, the results were broadly in line with market expectations. Citi analysts noted that the performance was even better than some investors had feared.

"More-than-expected research and development spending amid AI related investments was offset by decent marketing spending optimization," the analysts said.

Still, Kuaishou's second-half outlook appears challenging. Macroeconomic headwinds, regulatory changes affecting live-streaming e-commerce, and a high base effect are expected to weigh on e-commerce sales. These factors could force the company to increase support for merchants, further squeezing advertising and commission revenue, the analysts added.

Looking ahead, Citi expects investors to focus on Kling's annual recurring revenue growth and the timing of its next upgrade, which may improve sentiment around the stock.