Why could revenue growth accelerate again?

  • Goldman Sachs expects Kingsoft Cloud’s third-quarter revenue in 2026 to reach 3.3 billion yuan, up 34% year over year and accelerating from 31% in the second quarter, broadly in line with Visible Alpha market consensus. AI cloud revenue is expected to grow 81%.
  • The key change is improved supply of advanced GPUs, making it easier to convert customer demand into revenue. Goldman Sachs expects combined revenue from Xiaomi and Kingsoft to grow 63% year over year, up from 28% in the second quarter, making the two companies the main growth driver.
  • Growth is also becoming more dependent on these two major customers: Goldman Sachs expects their share of revenue to rise from 27% in 2025 to 38% in 2028. Xiaomi’s continued increase in AI investment is an important condition underpinning this growth path.

Why are margins falling despite faster revenue growth?

  • Kingsoft Cloud is placing greater emphasis on GPUaaS, which rents out GPU computing capacity through long-term contracts. Goldman Sachs believes such contracts offer good returns on invested capital, but the relatively reduced emphasis on model-as-a-service, or MaaS, growth will limit short-term gross margin improvement.
  • Goldman Sachs expects a third-quarter non-GAAP gross margin of 15.3%, broadly flat quarter over quarter; operating margin is expected to fall to 3.2%, with adjusted operating profit of approximately 105 million yuan, 17% below market consensus. Following the reversal of credit losses in the second quarter, administrative expenses are returning to normal and are expected to rise 22% quarter over quarter and fall 2% year over year.
  • Medium-term profit improvement depends mainly on revenue growing faster than expenses: in Goldman Sachs’ model, revenue grows at a compound annual rate of 28% from 2025 to 2028, while operating expenses grow just 3%. On that basis, it expects the non-GAAP operating margin to rise to 6%–7% in 2028.

Where will the money to expand computing capacity come from?

  • The company’s full-year guidance for capital expenditure and acquisition of leased assets totals 15 billion yuan; Goldman Sachs expects the total to reach 16 billion yuan in 2026. Third-quarter capital expenditure is expected to be 4.4 billion yuan, up 40% quarter over quarter, mainly to acquire advanced GPUs.
  • As of June 2026, the company’s cash balance was 4.7 billion yuan. Goldman Sachs expects a substantial portion of the investment to be supported by customer prepayments and GPU leasing; in 2025, leased GPUs accounted for approximately 40% of capital expenditure-equivalent investment. Expansion capacity therefore depends on both customer payment arrangements and lease financing. Difficulty accessing funds and dilutive financing are among the risks identified by Goldman Sachs.

Will DeepInfer improve profits or intensify competition?

  • Goldman Sachs believes DeepInfer, DeepSeek’s open-source inference optimization software, helps reduce deployment costs and improve utilization of different chip infrastructures. For Kingsoft Cloud’s MaaS, higher token throughput and lower unit costs could improve inference gross profit.
  • Assuming GPU rental costs of 4 dollars per hour and utilization of 70%, Goldman Sachs estimates that the inference gross margin could reach 85%; this measure applies only to the inference business. At the same time, open-source software could narrow Kingsoft Cloud’s model-tuning advantage over data center operators, intensifying competition at the inference layer.

Why maintain a buy rating while cutting the target price?

  • Goldman Sachs has broadly maintained its revenue forecasts for 2026–2028 and raised its adjusted EBITDA forecasts by 1%–2%, but cut its 12-month target price from 18 dollars to 15.5 dollars, while maintaining its buy rating.
  • The cut mainly reflects valuation inputs: the risk-free rate was raised to 5%, pushing the weighted average cost of capital up from 10.3% to 11.4%, while the perpetual growth rate remains 3%. Even with limited changes to operating forecasts, a higher discount rate reduces the present value of future cash flows.