Shares of Kingsoft Cloud have been on the rise in both Hong Kong (HK:3896) and Nasdaq (US:KC) trading after a strong lift on June 9, driven by the news that CEO and Vice Chairman Zou Tao purchased more shares in the company.

In a press release posted by the company, Tao disclosed buying 2 million shares at an average purchase price of HK$2.625 each in a trade that occurred earlier this week.

The transaction at this stage seems to have boosted the stock’s already-rising momentum from 12-month lows.

While the Beijing-based cloud services provider’s first-quarter results fell short of Street expectations, the narrowing net income losses and Zou’s investment raised confidence in the street from new and existing  investors.

It is worth noting that Kingsoft Cloud has a considerable ownership by public companies, collectively holding a majority stake of 55%. The large ownership means that these entities have a significant say in the company’s management and business strategy. Additionally, around 21% of Kingsoft Cloud’s shares are held by institutions.

Waning Institutional Interest

The downside to the ~21% of ownership by funds comes when analyzing the institutional investor trends over the last quarter. Research on the Fintel platform for KC stock revealed that the number of institutions on the register has declined by 13.6% during the most recent quarter.

The number of institutional long shares held declined by 4.30 million to 49.96 million shares as the average portfolio allocation plunged by almost 69% to an average weight of 0.22% by these funds.

These weak factors contribute to Kingsoft’s bearish Fintel Fund Sentiment Score of 7.16, which ranks the stock in the bottom 2% when screened against 36,244 other global stocks for the highest levels of institutional activity.

Some of the 121 institutions that have stuck around and that are on the register include; Canada Pension Plan Investment Board, Massachusetts Financial Services, BlackRock, Alpha Square Group, MFS Emerging Markets Equity Fund, Renaissance Technologies and State Street Corp.

Q1 Highlights

Kingsoft provided its first quarter update to investors on May 23, with results coming in below market expectations. Sales declined by 14% year-on-year to RMB 1.8 billion ($251.7 million), falling short of analyst forecasts of around RMB 2 billion. There were some positives from the result with net income losses narrowing to RMB 413 million, and the cost of revenue falling by 20%, which helped boost gross profit margins.

A chart from KC’s earnings page shows the profit beats and misses against consensus expectations for each result over the last three years.

Underlying losses measured by normalized EBITDA also improved, narrowing from $144 million down to $110 million during the quarter. However, weakened demand and project delays, influenced by the COVID-19 resurgence and Chinese New Year holidays, affected the company’s performance.

Looking ahead, Kingsoft Cloud’s management anticipates revenue growth of 3% to 5% in 2023, supported by delayed project deployments and increasing cloud demands, particularly in areas related to artificial intelligence and AIGC applications.

While the short-term market conditions remain challenging, the company’s focus on technological innovation, customer centricity, and sustainable development position it well for long-term success.

The KC stock is currently trading at around 1x price-to-sales ratio, which is 2x standard deviations below the historical average, suggesting potential undervaluation.

Improving Management Effectiveness

Fintel’s analysis on management effectiveness uses several traditional performance measures such as ROA, ROE and ROIC to track true performance. The operating cash return on investor capital (OCROIC) measures how much cash the company generates from its invested capital.

The improvement in OCROIC indicates that the company is utilizing its resources more efficiently, which is a good sign for long-term investors. The OCROIC has risen to its best level in two years at 0.02 after being negative over most of 2021 and 2022.

Broker Upgrade

Goldman Sachs analyst Timothy Zhao earlier this month upgraded Kingsoft Cloud to ‘neutral’ from ‘sell’, citing the stock’s recent underperformance, as it gave up 50% of gains from its annual high at the beginning of April.

Zhao advised clients that while he is still cautious on KC’s long-term growth and margin outlook when compared to other cloud infrastructure internet stocks, the recent underperformance more than reflects the concerns.

The shares are among the top 20 biggest holdings (1.3% weight) in the SPDR FactSet Innovative Technology ETF (US:XITK). That 100-stock exchange-traded fund is up 29% year to date, while KC stock has added almost 44%.

Goldman’s Zhao said that they are waiting for better clarity on the group’s sales and EBITDA trajectory against the clouded macroeconomic backdrop becoming more positive on the stock.

Regardless of the outcome, Fintel’s consensus target price of $5.96 for KC suggests analysts generally think the stock could rise a further 15% over the next year.

This article originally appeared on Fintel

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