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It Remains Unknown When Zhihu Can Make Mony Though Its MAU Tops 100 Million For The First Time

Dec. 06, 2021 3:06 AM ET
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  • Zhuhu’s monthly active users (MAU) exceed 100 million for the first time, and all three main businesses reap a huge harvest in the third quarter.
  • The Company posts a net loss of RMB 270 million for the quarter, but it is still scavenging for ways to make money.

Zhihu (ZH.US, the “Company”), an online integrated content community, announced its financial results for the third quarter of this year. It posted revenue of RMB 824 million in the third quarter, an increase of 115.1% year-over-year; the platform’s monthly active users exceeded 100 million for the first time, with 101.2 million in the third quarter, an increase of 40% year-over-year; and the average number of monthly paid users reached 5.5 million, more than doubling from the same period last year.

The company, which was founded in 2011, started its business as a knowledge-based Q&A community to a comprehensive content platform that covers all aspects of life. The Company’s performance in the third quarter was quite good, but has yet not been reflected in its stock which only rose about 4% the day of the release of the announcement, and further slid to $7.3 per share from $8.3 per share after a week, an all-time low. The reasons why the market is downbeat about Zhihu are: on one hand, the Company is not profitable yet, with a net loss of about 270 million yuan for the quarter and a trend of further loss expansion; on another hand, investors are confused about Zhuhu’s ways to make money.

User traffic is everything

Reference to Zhuhu’s third-quarter financials, we can know that the Company posted revenue of RMB 824 million, a bold increase of 115.1% compared to the RMB 383 million over the same period last year. The development of advertising business, paid membership and content commerce solutions go hand in hand to swell up the revenue.

Specifically, the advertising business remains the biggest source for Zhuhu’s revenue in the third quarter with an income of RMB 321 million, a rise of 38.9 year-on-year; paid membership achieved revenue of RMB 178 million, increasing 95.8% year-on-year; while the content commerce solutions sector earned RMB 278 million for the quarter, a fivefold more increase year-on-year, becoming another key propellant to the company’s revenue growth.

It has been repeatedly mentioned in the earnings report that the outstanding performance of Zhuhu’s businesses was the result of the growth of the user base, with active monthly users (MAU) on the platform rising beyond 100 million for the first time, reaching 101.2 million for the quarter. The growth in users brought great fortune to Zhihu’s seasonal revenue, demonstrating that the user traffic still places significance to internet enterprises. But, for the 10 years old Zhuhu, it seems too late for it to reach the mark of 100 million MAU.

There are a lot of excellent peers in the industry, for example, Xiaohongshu, or “Little Red Book”, a content community that centers on lifestyle. The inception of Xiaohongshu was two years later than Zhihu, but its MAU has already topped 150 million in the third quarter for the year; it has not yet gone public, but is attractive to market capital with recent fundraising of US$ 500 million, which makes its estimated valuation reaching US$ 20 billion, a fivefold more than Zhihu’s current market cap of US$ 4 billion.

As mentioned before, Zhihu’s average monthly number of paid users was only 5.5 million, though is relatively smaller than other peers, it still contributes more than one-fifth of its revenue. The platform’s active monthly users have just reached the 100 million mark, there is a huge growth potential going forward as the domestic market is big. Therefore, the company kicked off its commercialized path in 2018, and launched the content commerce solutions business until the latter half of 2020. What’s more, it also ventures into other areas such as short video, live-streaming, and e-commerce in a bid to appeal more users and thus broaden its user base.

An advertisement tool?

Since the first half of 2021, the sluggish growth or stagnation of the advertisement business has tumbled the revenues of many internet behemoths and enterprises, including CCTV, Tencent, and ByteDance due to the economic environment, policy changes, and enterprise operations. Differently, Zhuhu’s advertisement sector was out of the impact imposed by those factors but fueled by the “Zhi +” integrated solutions, namely the content commerce solutions, released by the company. “Zhi +” is a marketing tool that connects question answerers (content creators) with brands to help them make money and increase brand awareness.

But nowadays Zhihu is glutted with soft advertisements that are hard to recognize. There is a growing number of content creators inset soft ads in their answers which are usually found at the end of their posts, giving users a bad reading experience and lowering the authenticity and objectivity of contents. Furthermore, it comes into confrontation with its early position as an elite knowledge-sharing community, thus users are more sensitive and ad-hatred than other platforms’ users towards advertisement.

Nevertheless, the content commerce solutions reward the company with heavy harvest, with the sector contributing 34% revenue to the total revenue in the third quarter of 2021, becoming an important source of income to the company in just 2 years. Besides, the initiative has been able to motivate creators to produce more quality contents, which is good for attracting new users. However, users are more prone to be bombarded with various soft ads through the platform’s precise recommended contents. That makes users think of Zhihi has changed from a pure knowledge-sharing community to an ads aggregator.

Zhihu registered a net loss of US$ 270 million for the third quarter of 2021, up 245% year-over-year from last year's 110 million yuan. In addition, Zhihu’s investment in short video, live-streaming and internet literature and other fields need a large sum of money, which these tracks are already crowded with many rivals. In the foreseeable future, Zhuhu will follow the pattern of “burning money for size”, a common practice among internet companies, this would definitely exacerbate its loss woes.

Overall, Chinese internet companies always try to be large and all-inclusive but usually end up bloatedness. It may be a development strategy because no one knows which sector will succeed in the future. Now, Zhihu is one of them exploring its own road.

Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.

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