Zhihu Inc. (NYSE: ZH) recently announced its second quarter 2024 results, showcasing a mixed performance in terms of financial metrics. While the company reported a significant improvement in its bottom line, with operating and net losses narrowing substantially, there was a concerning decline in revenue. As a result, analysts and investors are closely monitoring ZH’s progress and evaluating its future potential.
Q2 2024 Financial Performance
In the second quarter of 2024, Zhihu’s operating loss and normalized net loss improved by 44% and 80% year-over-year, amounting to -RMB 184 million and -RMB 45 million, respectively. These results exceeded analysts’ consensus estimates, indicating a positive trend in the company’s cost management and operational efficiency. ZH highlighted that it maintained disciplined spending while achieving a high return on investment across all business lines.
Operating costs decreased by 17% year-over-year to RMB 740 million in Q2 2024, leading to an improvement in the operating costs-to-sales metric from 85% in the same quarter the previous year to 79% in the current period. Zhihu’s management emphasized its commitment to further cost optimization efforts in the upcoming quarters, particularly focusing on “loss reduction work” in Q3.
Looking ahead, ZH provided guidance that it could achieve a positive normalized net income in the fourth quarter of 2024. This would mark a significant milestone for the company, as it has never reported a profitable quarter since its public listing on the NYSE in March 2021. The company’s Q2 2024 non-GAAP adjusted net loss of -RMB 45 million represented its best quarterly bottom line performance to date, underscoring the progress made in improving its financial health.
Revenue Decline and Market Outlook
Despite the positive developments in its bottom line, Zhihu experienced a notable decline in revenue in the second quarter of 2024. The company’s top line fell by 11% year-over-year to RMB 934 million, indicating a worsening trend compared to the previous quarter’s decline of 3% year-over-year. While the actual revenue performance slightly exceeded expectations, the market anticipates further contraction in the second half of the year.
Analysts predict ZH’s revenue to decrease by 17% and 27% year-over-year in the third and fourth quarters of 2024, respectively. This outlook reflects concerns about the company’s ability to drive top line growth amidst its focus on narrowing losses and improving profitability. Zhihu’s revenue streams from pay membership and vocational training saw slight declines in Q2 2024, while marketing service revenue, which accounted for a significant portion of the top line, dropped by 17% year-over-year.
The company attributed the decline in marketing service revenue to strategic changes aimed at improving margins. ZH’s emphasis on cost optimization and profitability enhancement suggests a prioritization of financial sustainability over top line expansion. However, this approach may lead to further revenue declines in the coming quarters as Zhihu aims to achieve positive operating income by the end of 2024.
Market Valuation and Investment Outlook
Zhihu’s stock is currently trading at a depressed consensus next twelve months’ price-to-revenue valuation multiple of 0.58 times, significantly lower than its historical average of 2.0 times. Despite consistently beating bottom line estimates in recent quarters, the company’s P/S multiple has continued to de-rate due to negative revenue growth. Investors remain cautious about assigning a higher valuation to ZH until it demonstrates positive revenue growth alongside profitability improvement.
In conclusion, Zhihu’s performance in Q2 2024 reflects a mixed picture of financial results, with the company making strides in reducing losses but facing challenges in revenue generation. The market will closely monitor ZH’s progress in achieving a balance between top line growth and operational efficiency to support its long-term financial health. As of now, the rating for Zhihu’s stock remains a Hold, pending further developments in its financial performance and market outlook.
