Zhihu's Profitability Pivot: How Cost Cuts and AI Drive a New Era of Value

Zhihu Inc. (NYSE: ZH) has long been a beacon of high-quality content in China's digital landscape, but its recent financial results reveal a pivotal shift: the company is now prioritizing profitability over growth. Amid a 24% year-over-year revenue decline in Q1 2025, Zhihu slashed costs, optimized its AI-driven content ecosystem, and delivered its first-ever positive adjusted net income since its IPO. This strategic realignment positions Zhihu as a rare gem in a crowded market—a company transforming operational discipline and technological innovation into sustainable value.

The Profitability Breakthrough

The numbers tell a compelling story. While total revenue dipped to RMB729.7 million in Q1 2025, gross margin surged to 61.8%, up from 56.6% a year earlier. This improvement was fueled by aggressive cost management: operating expenses fell 34.4%, with selling and marketing costs dropping 32.9%, R&D spending down 28.1%, and general expenses collapsing by 55.6%. The result? A net loss narrowed to RMB10.1 million—93.9% smaller than in Q1 2024—and adjusted net income turned positive for the first time, hitting RMB6.9 million.

The key takeaway: Zhihu is no longer a loss-making growth story. By prioritizing margin expansion over revenue growth, it has created a leaner, more efficient engine for profitability.

The AI Edge: Differentiation Through Technology
Zhihu's AI initiatives are the unsung heroes of this turnaround. The company is leveraging AI to enhance its core strengths: high-quality content and trusted expert networks.

• Content Curation & Personalization: AI algorithms refine recommendations for Zhihu's 14.2 million monthly subscribers, boosting engagement. DAU time spent and creator activity are rising, even as revenue declines.
• Expert Synergy: Zhihu Zhida, its authoritative content pillar, uses AI to validate and amplify contributions from verified experts in fields like finance, tech, and healthcare. This builds trust in an era of misinformation.
• Operational Efficiency: AI-driven automation has reduced cloud services, bandwidth, and personnel costs—critical to the 33.3% drop in the cost of revenues.

Revenue Headwinds? Focus on the Right Metrics
Critics may point to the 24% revenue decline, but Zhihu's focus is on quality over quantity. Paid memberships remain the largest revenue stream (RMB417.9 million), and subscriber numbers are stable. Meanwhile, vocational training and marketing services—lower-margin segments—were intentionally scaled back to prioritize profitability.

This strategy isn't just about cutting costs; it's about redirecting resources to high-margin, high-value activities. The 10% share repurchase program proposed in Q1 2025 further signals confidence: Zhihu's cash pile of RMB4.77 billion (US$657 million) gives it the flexibility to invest in AI, buy back shares, and weather any short-term revenue dips.

Why Invest Now?
- Margin Expansion: Zhihu's gross margin could hit 65%+ in 2025 if cost discipline continues.
- AI-Driven Moats: Few platforms combine Zhihu's expertise in niche content with advanced AI tools. This differentiation defends against competitors like Baidu or ByteDance.
- Share Buybacks: A 10% repurchase would boost EPS and signal management's belief in undervalued shares.

Conclusion: A Rare Opportunity in the Chinese Tech Landscape
Zhihu's shift to profitability isn't just a numbers game—it's a strategic triumph. By marrying cost discipline with AI-powered innovation, it's creating a sustainable model in an industry still chasing growth at all costs. With a strong balance sheet, improving margins, and a repurchase program on the horizon, Zhihu is primed to reward investors who look beyond short-term revenue trends.

This is a stock for long-term investors seeking stability in a volatile market. Act now—before others catch on.