KE Holdings' Q2 Earnings: A Tale of Resilience and Undervaluation in a Shifting Real Estate Landscape

In the second quarter of 2025, KE Holdings Inc. (BEKE) delivered a mixed but telling performance for investors navigating the volatile Chinese real estate tech sector. The company reported RMB26.0 billion (US$3.6 billion) in net revenues, a 11.3% year-over-year increase, driven by robust growth in new home transactions, home renovation, and rental services. However, this figure fell slightly short of analyst estimates of RMB26.19 billion, marking a narrow revenue miss. Despite this, KE Holdings outperformed on the bottom line, with adjusted EPS of $1.55, exceeding the consensus estimate of $1.53. This divergence between revenue and earnings highlights a critical inflection point for the company: a potential undervaluation amid structural challenges in the sector.

Revenue Resilience in a Fragmented Market

KE Holdings' revenue growth was fueled by strategic diversification. New home transaction services rose 8.6% to RMB8.6 billion, while home rental services surged 78% to RMB5.7 billion, driven by the Carefree Rent model. These segments offset a decline in existing home transaction services, which fell 8.4% due to a shift toward lower-margin, platform-based commissions. The company's non-housing services now account for 41% of total revenues, a record high that underscores its pivot toward recurring revenue streams.

Yet, the revenue miss—though marginal—reflects broader market headwinds. China's real estate sector remains in a transitional phase, with consumer demand shifting toward affordability and flexibility. KE Holdings' expansion into rental and renovation services aligns with these trends, but the company's reliance on transaction volumes makes it vulnerable to macroeconomic fluctuations.

Profitability Pressures and Strategic Reinvestment

The company's profitability metrics tell a different story. Gross margin fell to 21.9% from 27.9% in Q2 2024, and operating margin dropped to 4.1% from 8.6%. These declines were driven by higher fixed compensation costs, a shift in revenue mix toward lower-margin services, and rising operational expenses. Net income fell 31.2% to RMB1,307 million, while adjusted net income dropped 32.4% to RMB1,821 million.

However, the adjusted EPS beat—despite these declines—suggests a narrowing of costs and a focus on efficiency. The company's R&D spending increased 25.6% year-over-year to RMB633 million, reflecting investments in AI-driven tools to streamline operations and enhance agent productivity. These initiatives, while costly in the short term, position KE Holdings to capture long-term value in a sector increasingly defined by technological differentiation.

Shareholder Returns and the Case for Value Investors

KE Holdings' recent $5 billion share repurchase program extension (up from $3 billion) signals confidence in its intrinsic value. As of Q2's end, the company had repurchased $394 million worth of shares in 2025 alone. This capital allocation strategy, combined with the EPS outperformance, hints at a compelling risk-rebalance for value-oriented investors.

The stock's muted reaction to the earnings report—remaining nearly flat post-announcement—further suggests the market is underappreciating the company's strategic resilience. While revenue growth has slowed compared to Q1's 42.4% year-over-year surge, the 11.3% increase still outperforms industry averages. Moreover, KE Holdings' P/E ratio of 8.2x (as of August 21, 2025) is significantly below its five-year average of 12.5x, indicating potential undervaluation.

Is This a Near-Term Buying Opportunity?

For value investors, the key question is whether KE Holdings' earnings divergence justifies a near-term entry. The company's revenue resilience in a shrinking market, coupled with its aggressive cost management and shareholder-friendly policies, creates a compelling case. However, risks remain:

1. Margin Compression: The shift to lower-margin services could persist, pressuring profitability.
2. Sector Volatility: China's real estate market remains fragile, with policy-driven cycles posing uncertainty.
3. Execution Risks: The success of AI and AI-driven operational restructuring is unproven at scale.

That said, the company's $5 billion repurchase authorization and $1.55 adjusted EPS—which exceeded estimates—suggest management is prioritizing shareholder value. For investors with a 12- to 18-month horizon, KE Holdings' discounted valuation and strategic momentum could offer a compelling risk-reward profile.

Conclusion: A Calculated Bet on Resilience

KE Holdings' Q2 results reflect the duality of its position: a resilient revenue model in a fragmented sector, paired with near-term profitability challenges. The narrow revenue miss and EPS beat highlight a company navigating a complex environment with agility. While the path to profitability is not without hurdles, the combination of strategic diversification, capital efficiency, and shareholder returns positions KE Holdings as a potential undervalued play in China's real estate tech landscape. For value investors willing to tolerate sector volatility, the current valuation offers a calculated opportunity to capitalize on a firm poised for long-term transformation.