Keling reaches 500 million ARR; Kuaishou resolves a suspense in two years.

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Introduction

On May 27, 2026, after Kuaishou released its Q1 earnings report, Futu maintained a buy rating but lowered its target price from HK$106 to HK$82, Citi dropped from HK$95 to HK$72, and Morgan Stanley reduced from HK$73 to HK$55. Four institutions collectively cut target prices by over 20%, putting post-market share prices under pressure. Yet in the same earnings call, CEO Cheng Yixiao spent nearly half the time discussing Kling AI: Q1 revenue surpassed RMB 650 million, with annualized revenue about USD 500 million, nearly quadrupling year-over-year. In the same earnings report, institutions were calculating profits, while the CEO was outlining his AI vision—this mismatch is the starting point for understanding Kuaishou's Q1 2026.

01 The Quarter When Profits Were Halved

First, the basic figures: Q1 2026 total revenue RMB 33.72 billion, up 3.4% YoY, modestly beating market expectations (~RMB 33.4 billion) by about 0.9%, a lukewarm mild beat.

But the profit side wasn’t so smooth. Adjusted net profit of RMB 3.37 billion, a YoY decline of 26.3%; GAAP net profit RMB 2.91 billion, down 27% YoY, equivalent to basic EPS of RMB 0.67, nearly 30% lower than last year’s RMB 0.92. Adjusted net margin—profit per RMB 100 revenue after excluding one-off items like stock-based compensation—fell to 10.0%. Q2 2025 reached a peak of 16%; in just one year, it was almost cut in half.

More broadly, this wasn’t a one-off quarterly anomaly but the continuation of a trend. Since Q3 2025, Kuaishou’s revenue growth rate has entered a sustained slowdown channel: Q3 2025 +14.2% YoY, Q4 +11.9%, Q1 2026 down to 3.4%, touching a two-year low. Structural contraction in livestreaming revenue—Q1 down 13.5% YoY, double-digit declines for multiple quarters—and slowing ad growth are gradually narrowing Kuaishou’s revenue elasticity.

This is the historic backdrop for Kuaishou’s current crossroads: after reaching a market cap peak of over HK$1 trillion at its 2021 IPO, it underwent deep adjustments due to tighter regulation, intensifying competition, and profit pressure; from 2023 to 2025, improved ad monetization efficiency turned losses into profits, raising net margin from zero to a 16% peak in three years. But the heavy AI investment begun in late 2025 is now exchanging that accumulated margin for a bet on the next growth curve.

User-side data remains one of few stable items in the report. MAU reached 771.7 million, up 8.4% YoY, setting a new record; DAU at 412.7 million, up 1.2%, also hitting a record high during the Spring Festival. In the broader environment of content platforms trending toward stock competition, Kuaishou’s continued ability to add tens of millions of monthly active users shows its content supply and algorithmic distribution remain solid. However, DAU/MAU declined from about 57% last year to 53.5%, meaning new users are less active than the core user base—the scale is growing, but their engagement is relatively shallow, a structural change warranting attention.

02 AIEngine Ignition

Here’s why, following the four institutions’ target price cuts, the market didn’t turn completely bearish—because one figure stands in the way: Kling AI’s annualized Q1 revenue of $500 million, up 4x YoY.

Kling is Kuaishou’s AI video generation large model launched in mid-2024, initially benchmarking Sora and Runway. There was skepticism externally whether it could be commercially successful—since Kuaishou is fundamentally a short-video ad company without a To B AI service gene—but Q1 2026 results have already disproved that skepticism.

Breaking down the $500 million ARR: revenue comes from both C-end—creators’ subscriptions and pay-per-use—and B-end—API calls and enterprise customization. Management said AI anime marketing spend grew over 100x YoY, indicating advertisers are using Kling-generated AI content for commercial campaigns, forming a complete content generation to ad monetization chain. Meanwhile, Kuaishou launched MyFlicker, an AI tool for workplace scenarios, aiming to open new B-end commercialization tracks.

For reference: In global AI video generation commercialization, Runway’s estimated ARR is about $70 million, while Kling has already achieved a significant lead among public competitors. Kling-driven, Kuaishou’s other services segment earned RMB 5.58 billion in Q1, up 15.9% YoY, the only revenue line with accelerating growth.

However, the $500 million ARR is an annualized figure, and Kuaishou’s single-quarter actual revenue is only about RMB 650 million; AI remains less than 3% of total revenue. Kling’s story is real, but for it to truly reshape Kuaishou’s financial model, several quarters of sustained validation are still needed.

03 Did Ads Accelerate?

Ads have been the core narrative pillar for Kuaishou’s valuation rebuilding over the past three years. Q1 2026 displayed a crack in this pillar—but before worrying, seasonal and structural effects need to be separated.

Online marketing revenue was RMB 19.64 billion, up 9.3% YoY. This was below the market’s consensus estimate of 12–15% and far below Q1 2025’s 20.1%. On the surface, this is a clear miss. But digging deeper, Q1’s off-season advertising effect was doubly amplified: first, post-Chinese New Year, brand clients undergo systematic budget cutting, making Jan–Feb the weakest spending period; second, base effect—Q1 2025’s 20% growth was already an unusually high base, making further growth more difficult.

Underlying structural indicators paint a different picture. Brand GMV grew by 25% YoY, and ad spend by advertisers in the “Chengfeng Plan”—Kuaishou's deep cooperation project for brand clients—increased by 42%. These numbers indicate the pool of brand ads is expanding, though the bill was seasonally discounted in Q1. Kuaishou’s self-developed UAX automated smart ad delivery tool continues lowering barriers for smaller brands to enter the ad ecosystem, providing sustained positive momentum for internal ad circulation.

Livestream revenue was RMB 8.49 billion, down 13.5% YoY. This marks the fifth consecutive quarter of double-digit decline, not an anomaly but part of an industry trend—decline in streamer tipping culture, shifting user willingness to pay toward e-commerce, with Kuaishou guiding streamers to direct traffic to e-commerce GMV rather than strive to preserve tipping income. Livestream losses continue, but the speed is in line with analyst expectations, with no new negative surprises.

04 The Most Worthy Number to Watch

Of the entire report, one metric more deserving of singular analysis than the halved profit is gross margin.

Q1 2026 gross margin was 51.2%, down 3.4 percentage points YoY—Q1 2025 was 54.6%, a six-quarter low. Many analysts glossed over this figure, but its logic reflects Kuaishou’s AI investment’s real impact on the financial model.

Detailing the costs: revenue grew 3.4% YoY, but cost of revenue grew 10.0%. Cost growth was nearly three times revenue growth. The “scissors gap” primarily comes from AI infrastructure—GPU cluster procurement and depreciation, AI training and inference bandwidth and compute consumption, all entering the gross margin bill as direct service cost, not just as capital expenditure.

This is a crucial perspective: outsiders often focus on Kuaishou’s Q1 capital expenditure of RMB 12.1 billion but overlook how AI investment has quietly permeated every bit of gross margin. Out of every RMB 100 revenue, nearly RMB 49 goes to cost, up by over RMB 3 year-over-year.

The annual capital expenditure guidance of RMB 26 billion remains unchanged. Q1 executed about RMB 12.1 billion, or 46.5% of annual guidance, management promises second half will be significantly lower than first half. This is the central logic—if second-half capex truly drops, depreciation pressure relieves, gross margin could rebound to 53% or higher; if capex doesn’t drop, swapping profit for AI becomes an open-ended ticket.

05 How is the Market Judging?

Post-earnings, focus among analysts has quietly shifted from how much room Kuaishou has for ad growth, to when Kling AI’s monetization density can lift to a higher valuation center. This is a narrative framework migration, not just a quarterly recap.

Specific institutional views: Morgan Stanley dropped target price from HK$73 to HK$55, maintaining neutral rating, core rationale being rapid and greater-than-expected gross margin decline, systematically cutting full-year 2026 profit forecasts; HSBC lowered from HK$89 to HK$65, citing Kling AI’s underestimated ROI cycle as major risk, believing livestream contraction plus ad slowdown leave insufficient earnings elasticity for premium short-term valuation; Citi went from HK$95 to HK$72, remaining cautious, key issue being how much net profit each dollar of Kling ARR can ultimately convert—this monetization density is not yet transparent; Futu remains most optimistic, target price HK$82, defining Kling ARR’s 4x YoY growth as an unexpectedly structural breakthrough, believing Kuaishou is trading short-term profit for long-term AI platform premium.

Futu’s HK$82 vs Morgan Stanley’s HK$55—difference of HK$27—reflects two answers to the same question: Is Kuaishou’s RMB 26 billion capex a finite construction cost, or an open-ended commitment? Overall, most of the 31 covering analysts maintain buy or neutral ratings, but average target price has dropped from pre-earnings HK$74 to the HK$65–72 range.

It’s worth noting this systemic target price cut is a collective adjustment of full-year 2026 profit forecasts, not a fundamental doubt about Kuaishou’s business model. Most institutions lowered short-term profit contribution forecasts, but are generally optimistic about profit elasticity after AI capex recedes in 2027 and beyond. This explains why despite sharp target price cuts, ratings barely changed—institutions are shifting their qualitative definition from ad media to a combination of AI infrastructure and content platform, a redefinition requiring more quarterly data to finalize.

Editorial Conclusion

Kuaishou’s Q1 2026 ledger can be summarized in one sentence: trading profit for time. The visible cost is halved profit, the expected return signal is Kling AI’s 4x ARR YoY growth, and 51.2% gross margin is the underestimated hidden cost of the transaction. The question isn’t if the math adds up, but when it’ll be settled.

In the next two quarters, three specific things are worth watching: First, H2 capex numbers—management’s promised reduction needs actual figures, as quarterly capex is the most direct leading indicator for gross margin direction; Second, whether Q2 Kling ARR can surpass $700 million—the CEO gave directional hints in the call; if it does, AI monetization shifts from a quarterly peak to an accelerating trajectory, fundamentally changing market AI narrative valuation logic; Third, whether Q2 ad growth can return to 20%—momentum accumulated from “Chengfeng Plan,” UAX tool, and brand GMV needs to show up in Q2 peak season bill, deciding if the ad slowdown is seasonal or structural.

Halved profits aren’t Kuaishou’s endpoint, but nor is it a bond that can be endlessly rolled over. The timetable is the only line in the story yet to be written.

Data sources: Kuaishou Technology Q1 2026 results announcement (HKEx, 2026-05-27); Kuaishou Q1 2026 earnings call transcript; FMP historical financial data; institutional research reports. This article does not constitute investment advice.

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Data source: Kuaishou Technology2026Q1Results Announcement (HKEx)| This article does not constitute investment advice

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