Zhihu shares rise over 2% as company swings to profit in second quarter

Zhihu Inc. (NYSE:ZH) reported a significant turnaround in its second quarter 2025 financial results, swinging to a net profit of RMB72.5 million and achieving its third consecutive non-GAAP profitable quarter. This profitability was driven by a 27.2% reduction in operating expenses and an expanded gross margin of 62.5%, attributed to efficiency initiatives and AI integration, despite a revenue decline to RMB716.9 million. The market responded positively, with shares rising 2.59% in pre-market trading, reflecting investor recognition of the company's successful pivot towards profitability and cost discipline over top-line growth.

Analysis

Zhihu Inc. executed a significant strategic pivot toward profitability in its second quarter of 2025, swinging to a net income of RMB72.5 million from a net loss of RMB80.6 million in the prior year. This marks the company's third consecutive quarter of non-GAAP profitability, achieved despite a notable decline in revenue to RMB716.9 million from RMB933.8 million year-over-year. The core driver of this turnaround was aggressive cost discipline, evidenced by a 27.2% reduction in total operating expenses. This operational efficiency, which management attributes to refined strategies and AI integration, also contributed to an expansion in gross margin to 62.5% from 59.6%. While the largest business segment, paid membership, saw revenue dip slightly to RMB402.0 million, the company maintains a robust balance sheet with RMB4.82 billion in cash and short-term investments, providing substantial runway for its ongoing strategic realignment. The market's initial positive reaction, with a 2.59% pre-market stock increase, suggests investors are currently valuing the demonstrated cost control and margin improvement over top-line growth.

Key Decisions for Investors

• Investors should weigh the company's successful pivot to profitability against the significant decline in revenue, assessing whether the current strategy of prioritizing margin over growth is sustainable for long-term value creation.
• Monitor future reports for evidence that AI-driven efficiency gains, which cut operating expenses by 27.2%, can translate into stabilizing or re-accelerating revenue, particularly in the core paid membership segment.
• Consider the company's strong liquidity position of RMB4.82 billion as a key risk mitigant, providing management the flexibility to execute its turnaround strategy without immediate financing pressures.
• Closely track user monetization metrics, as the slight decline in paid membership revenue indicates a need for future growth in either subscriber numbers or average revenue per user to validate the long-term business model.