Kuaishou Technology’s second-quarter earnings fell by more than a third as the Chinese short-video company increased spending on artificial intelligence and paid more to content creators, highlighting the growing cost of competing in China’s rapidly evolving digital and AI economy.
Net income dropped 36% from a year earlier to 3.15 billion yuan, or about $467 million, in the three months ended June. That was the company’s sharpest profit decline in five years and only the fourth quarterly contraction since 2021. Revenue, meanwhile, remained broadly stable at 35.5 billion yuan, roughly in line with market expectations.
The results expose a difficult trade-off facing Kuaishou. The company is investing heavily in artificial intelligence because it believes AI can become an important growth engine, but those investments are putting immediate pressure on profitability.
At the same time, Kuaishou is spending more to maintain its ecosystem of creators. Revenue-sharing payments to content producers increased substantially, adding another layer of pressure to margins.
The combination means Kuaishou is spending more while generating relatively little additional revenue from its core operations.
The company’s total revenue increased only 1.4% year over year to 35.5 billion yuan, according to financial data released Wednesday. Online marketing services provided much of the growth, while the livestreaming business declined.
That contrast is important because advertising has become increasingly important to Kuaishou as the company attempts to reduce its reliance on livestreaming.
Kuaishou operates one of China’s largest short-video and livestreaming platforms, competing directly with ByteDance’s Douyin and other major internet companies for users, advertisers and creators.
Its platform depends on a delicate ecosystem. Users generate content, creators attract audiences, advertisers pay to reach those audiences and Kuaishou takes a portion of the resulting economic activity.
Keeping creators on the platform is therefore essential.
Higher creator payments can help Kuaishou remain competitive, but they also increase costs. During the second quarter, revenue-sharing expenses and research-and-development costs both increased by about 35%, according to the company’s results.
Research and development spending is particularly significant because much of Kuaishou’s recent investment has been directed toward artificial intelligence.
The company has been developing Kling AI, its text-to-video generation platform, as one of its most important bets on the future.
Kling has attracted significant international attention because it allows users to generate sophisticated videos using artificial intelligence. Kuaishou is attempting to turn that technology into a meaningful commercial business rather than treating it simply as an experimental product.
There are signs that demand is growing.
Kling AI revenue increased more than 200% in the second quarter, according to the company’s results. But that growth rate slowed from roughly 300% in the previous quarter, suggesting that the initial acceleration may be becoming harder to sustain.
That slowdown matters because investors are increasingly trying to determine whether China’s AI companies can turn rapidly growing usage into sustainable profits.
AI video generation is an expensive business. Training increasingly sophisticated models requires enormous amounts of computing power, while serving millions of users can generate significant inference costs.
Kuaishou therefore faces a familiar problem across the technology industry: AI can create a potentially enormous new market, but building the infrastructure and models required to compete can consume substantial amounts of cash before the revenue opportunity becomes large enough to offset those expenses.
Kuaishou has nevertheless continued to invest aggressively.
Kling AI recently attracted backing from major Chinese technology companies, including Alibaba and Tencent, as part of a $2.8 billion financing round. The investment reflects growing expectations that AI-generated video could become a major commercial category, particularly as global demand for generative video tools expands.
That outside investment gives Kling additional financial resources, but it also raises expectations.
Kuaishou needs to demonstrate that its technology can move beyond impressive demonstrations and become a scalable business.
The company’s traditional business is facing challenges at the same time.
Livestreaming revenue declined during the quarter, offsetting much of the growth from online marketing services. That is significant because livestreaming has historically been one of Kuaishou’s core monetization channels.
The decline suggests that the platform cannot simply rely on its established business model to fund its AI ambitions.
Advertising offers a more promising source of growth. Kuaishou has been improving its advertising technology and using AI to help merchants and brands target consumers more effectively.
Better recommendation algorithms can increase the amount advertisers are willing to pay by making advertisements more relevant and improving conversion rates.
This creates an important connection between Kuaishou’s AI investments and its existing business.
The company does not necessarily need Kling AI alone to become a huge standalone business. AI can also improve advertising, recommendation systems, e-commerce and content creation across the wider platform.
That could eventually justify some of the current spending even if direct AI revenue remains relatively small.
The problem is timing.
Investors are paying for AI growth today, while the financial benefits may arrive years later.
That mismatch is becoming increasingly visible in Kuaishou’s earnings. Revenue is growing slowly while costs associated with AI and creators are rising much faster.
The result is significant pressure on margins.
Kuaishou itself warned that its near-term operating environment remains difficult and increasingly complex. Management said it would continue expanding Kling AI’s model capabilities while searching for additional commercialization opportunities.
That cautious outlook is important.
Kuaishou is not promising an immediate reversal in profitability. Instead, management appears willing to accept near-term pressure in exchange for building a stronger position in AI.
Whether investors accept that strategy will depend on how quickly the company can demonstrate returns.
The competitive environment makes the challenge even harder.
Chinese technology companies including Tencent, Alibaba and ByteDance are all investing heavily in AI. These companies have deeper financial resources and enormous user bases, giving them the ability to sustain high levels of spending.
Kuaishou therefore cannot afford to fall behind technologically.
But matching competitors’ investment levels could further compress profits.
This creates a difficult strategic balance. If Kuaishou spends too little, it risks losing relevance as AI becomes embedded across digital platforms. If it spends too much without generating sufficient returns, shareholders could question whether management is destroying value in pursuit of an uncertain opportunity.
The company’s creator economics add another complication.
Kuaishou’s competitive advantage depends heavily on maintaining a large and active creator community. Higher payouts can encourage creators to produce more content and remain loyal to the platform, potentially increasing user engagement.
But those payments also mean Kuaishou does not capture all of the economic value generated by its platform.
In an increasingly competitive short-video market, reducing creator compensation could push influential users toward rivals.
Kuaishou therefore has limited flexibility to cut those costs aggressively.
The second-quarter results show the consequences of that strategy.
The company is effectively paying for two battles at once: defending its existing social-media and livestreaming ecosystem while attempting to build a position in generative AI.
For now, the financial results suggest that the costs are arriving faster than the benefits.
That does not necessarily mean Kuaishou’s AI strategy is failing. Kling’s revenue growth demonstrates that there is already commercial demand, while the company’s broader AI investments could eventually improve advertising and e-commerce economics.
But the slowdown in Kling’s growth rate is a warning that rapid initial adoption should not automatically be interpreted as a guarantee of long-term profitability.
The broader AI industry is entering a more demanding phase.
During the initial wave of generative AI, investors largely focused on user growth and technological capabilities. Increasingly, the question is whether companies can generate enough revenue to justify the enormous cost of computing infrastructure, research and development.
Kuaishou’s results illustrate that transition clearly.
The company has a potentially valuable AI product, but building it is expensive. It has a large creator ecosystem, but maintaining that ecosystem costs money. Its advertising business is growing, but not quickly enough to offset all of the additional spending.
That leaves Kuaishou at a critical point.
The company needs its AI investments to start producing meaningful commercial returns before prolonged cost increases begin to undermine the profitability of its core business.
If Kling can accelerate monetization and AI improves advertising efficiency across Kuaishou’s platform, today’s spending could eventually look justified.
If growth continues slowing while costs remain elevated, however, investors may become increasingly skeptical.
For now, Kuaishou’s latest results show a company caught between two eras. Its established business is mature and facing pressure, while its AI business offers substantial long-term potential but requires heavy investment.
The 36% earnings decline is therefore more than a weak quarterly number. It is evidence of the financial price Kuaishou is paying to compete in the next stage of China’s technology industry.
The key question is whether that investment can eventually produce enough growth to rebuild profitability.
