Cloud Music Earnings: Strategic Pivot Out of Livestreaming Means Accelerated Breakeven

We maintain our fair value estimate of HKD 130 for no-moat-rated Cloud Music 09899 following its parent company NetEase releasing earnings with limited financial information on Cloud Music. To us, the biggest surprise was Cloud’s latest change in strategy which led to a double-digit decline in its live-streaming revenue during the first quarter. We view this as part of the company’s pivot to focus more on profitability than revenue size. Gross margin in the first quarter improved to 22.4% versus 17.8% in fourth quarter 2022, and we attribute part of this margin improvement to Cloud’s lowering of revenue sharing with live streamers.

On balance, we don’t believe the latest shift in strategy has any major impact on our fair value estimate. Still, management didn’t provide a breakeven timeline, but we think it can happen as soon as this year, considering the firm’s increasing focus on improving profitability.