On Monday, JPMorgan made an adjustment to its stance on Kingsoft Cloud (NASDAQ: KC), upgrading the stock from Neutral to Overweight, while simultaneously reducing the price target to $4.20 from the previous $4.50.
The firm's analyst cited a forecast that Kingsoft Cloud's margin expansion will outpace market expectations, attributing this to a combination of a favorable shift in revenue mix and a decrease in depreciation expenses.
The analyst pointed to two main drivers behind the expected margin expansion: a shift in revenue mix towards higher-margin businesses, including rapidly growing AI revenue, and a decrease in lower-margin Content Delivery Network revenue.
Additionally, a reduction in depreciation expenses following major asset write-offs in the third quarter of the previous year is anticipated to contribute to the improvement in margins.
JPMorgan anticipates that Kingsoft Cloud will reach EBITDA-level breakeven in the first quarter of 2024 and achieve full-year EBITDA breakeven for the first time within the same year. This outlook is more optimistic than the consensus expectations, which project an EBITDA loss for the company.
Despite the stock's 30% decline year-to-date, which contrasts with the KWEB's 7% drop, JPMorgan believes the decline is mainly due to weak market sentiment towards loss-making, small-cap names, rather than the fundamental development of the company.
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