On Thursday, Citi adjusted its outlook on Zhihu Inc (NYSE: ZH) shares, reducing the price target to $5.40 from the previous $8.40. However, the firm kept its Buy rating on the stock.
The decision was based on Zhihu's commitment to achieving breakeven by the fourth quarter of 2024 through the optimization of lower efficiency projects and business operations. This strategy is anticipated to lead to a decline in both revenue and operating expenses, particularly in sales and marketing.
Zhihu's management has indicated that more significant improvements are expected starting from the second quarter of 2024. The year 2024 is considered crucial for the company as it shifts towards a strategy focused on quality growth, which is deemed necessary in the face of challenging macroeconomic conditions.
Citi's stance reflects an expectation that as Zhihu moves towards breakeven, its cash flow will improve, supported by a cash balance that is higher than its market capitalization.
Despite the positive outlook on Zhihu's financial management and strategy, Citi has expressed reservations due to the limited visibility on the company's long-term growth trajectory. Consequently, revenue forecasts for 2024 have been lowered to account for the downsizing of less efficient businesses.
The new price target of $5.40 is based on a price-to-sales multiple of 1.0 times the estimated 2025 sales, a reduction from the previous multiple of 1.4 times. This adjustment also includes a 30% discount compared to the peer group multiple.
In summary, while Citi has lowered its price target for Zhihu Inc, the firm maintains a Buy rating, indicating a belief in the company's potential for improved cash flow and financial stability once it achieves its goal of breaking even by the end of 2024. The revised target reflects a more conservative valuation in light of the strategic changes and macroeconomic headwinds.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.