How do you think about Zhihu's IPO in US?

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In-depth Analysis of Zhihu's IPO Prospectus: What’s its Value? How Does it Make Money? Why Does it Deserve to Exist?

©Shenxiang Original · Author｜Wang Xiange

The靴子of Zhihu's IPO has finally landed. Compared with many 'newcomers' that rushed to go public just two or three years after establishment, Zhihu has been around for a full decade.

On January 2011, Zhihu officially launched its product, subsequently experiencing debates between niche and mass appeal as well as facing multidirectional competition from rivals like Wukong Q&A and Fenda. Ten years later, on March 5, 2021, Zhihu submitted its IPO application, signaling that China’s largest online Q&A community is about to enter the secondary market and move into an entirely new phase.

The prospectus provides comprehensive disclosure of its revenue situation and operational data, finally offering an opportunity to gain deeper insights into Zhihu’s fundamentals and development trends.

Founder and CEO of Zhihu, Zhou Yuan

Detailed Explanation of Financial Data in the Prospectus

First, let's look at the income situation:

In 2020, Zhihu generated total revenues of 1.352 billion yuan, representing a year-over-year increase of 101.7%; under Non-GAAP terms, the net loss was 337 million yuan, with a net loss margin of 25%.narrowed significantly compared to the same period last year。

In fact, the annual revenue of 1.352 billion yuan is not a large figure. Comparing this with the data Bilibili (B station) released when it went public in 2018, Bilibili’s revenue in 2017 had already reached 2.468 billion yuan. However, at that time, Bilibili's gaming revenue contributed significantly, accounting for over 80% of its total revenue, whereas Zhihu’s revenue composition does not include a gaming segment.

Zhihu’s revenue mainly consists of three segments: advertising revenue, membership fee income, and content commercialization solutions revenue.

The largest revenue source is advertising income. In 2020, Zhihu's advertising revenue reached 843 million yuan, a year-on-year increase of 46%, accounting for 62.4% of total revenue.

As is well known, many advertisers significantly cut their advertising budgets over the past year. Additionally, advertisers’ placement strategies have become more cautious than before, shifting from widespread multi-channel investments to focusing on channels with higher conversion efficiency.Despite the overall weakness in the advertising market, Zhihu still achieved a full-year growth of 46%, a performance that far outpaced the broader advertising market.

Zhihu has always been restrained in terms of advertising.

Zhou Yuan believes that advertisements should be a form of valuable content. Based on his assessment, Zhihu’s knowledge-based attributes inherently generate topics and are also a source of creativity. Native, non-intrusive, and experiential marketing integrated with content represents the mainstream trend of future mobile marketing. From this perspective, Zhihu’s advertising commercial value far exceeds platforms that can only offer display ads.

For example, Zhihu user 'Lan Da Xian Ren,' leveraging his deep research and experience in TVs, along with Zhihu’s 'Good Product Recommendations,' created a TV grass-planting review article titled 'The Latest September 2020 LCD Smart TV Buying Guide.' Since its launch at the end of 2019, with monthly updates, it has driven over 50 million yuan in GMV conversions.

In 2019, Zhihu began experimenting with membership fee revenue outside of advertising, and by 2020, membership fee revenue had risen to 320 million yuan, marking a substantial year-on-year increase of 264.2%. Its contribution to total revenue rose from 13.1% in 2019 to 23.7% in 2020, reflecting Zhihu members' high engagement and willingness to pay.

Zhihu has formed a high-value paid content library that includes audio and video courses, e-books, journals and magazines, a thesis repository, and Salt Select columns, with a total content count exceeding 3 million pieces and annual visits surpassing 3 billion.

The content commercialization platform 'Zhi+' fully launched in 2020, which provides content service solutions for enterprises and individual users, achieved an annual revenue of 136 million yuan, accounting for over 10% of the total revenue.

This also creates a 'win-win-win' stage: corporate clients can efficiently operate commercial content on Zhihu; regular users can access efficient content for information, products, and services; and Zhihu creators can move away from creating content purely out of passion and truly enter a virtuous cycle of incentivized creation.

Additionally, Zhihu’s online education and e-commerce services generated an annual income of 52.63 million yuan, representing a year-on-year growth of 1083%. Although this portion of revenue accounts for a smaller proportion of the overall business, it is undeniable that both online education and e-commerce are lucrative sectors, and there is potential to grow significantly within Zhihu’s highly engaged user base.

Overall,Zhihu primarily employs diversified monetization methods centered around content, including online advertising, paid memberships, commercial content solutions, and other services(including online education and e-commerce)as the main monetization channels.。

Zhihu's commercialization is still in its early stages, and as growth continues and the commercial ecosystem gradually improves, the momentum in this area will further increase.

Looking at operational performance:

In terms of profitability, Zhihu's gross profit for the full year 2020 was 758 million yuan, with a gross margin of 56%. With a substantial increase in revenue, the gross profit level also grew rapidly, with the gross margin improving by nearly 9.4 percentage points compared to 2019, fully demonstrating the company's ability to continuously optimize costs.

In terms of profitability, although Zhihu was still in a net loss under Non-GAAP in 2020, with a net loss of 337 million yuan, the overall loss narrowed significantly compared to 2019. The company's net loss rate in 2020 was -25%, a substantial improvement from -123% in the previous year.

The rapid narrowing of Zhihu’s losses can be attributed to the optimization of gross profit margins on one hand, and a significant improvement in operational efficiency on the other.

Despite doubling its total revenue in 2020, Zhihu's operating expenses were only 1.361 billion yuan, slightly down compared to 2019.(1.371 billion yuan for the full year of 2019)。This indicates that Zhihu’s strategy is not about 'burning cash to gain market share,' but rather 'efficiency driving growth.'

Particularly in marketing spending, Zhihu’s total marketing investment in 2020 was 735 million yuan, a decrease of 31 million yuan compared to 2019 — Zhihu’s rapid growth in user numbers and creators was not achieved by increasing marketing expenditure, but rather through organic traffic growth driven by the platform’s content and community atmosphere.

In terms of cash flow, Zhihu’s net operating cash flow in 2020 was negative 244 million yuan.

Although it has yet to achieve full self-sustaining profitability, the situation has improved significantly compared to 2019. Meanwhile, Zhihu’s current cash reserves stand at a high of 3.1 billion yuan. For a company that does not need to spend heavily to drive growth, this provides a considerable margin of safety.

Positive Cycle Between Users and Creators

As analyzed above, Zhihu’s growth is not reliant on 'burning cash.' Instead, the unique value of its community fosters strong user stickiness and creator enthusiasm, pushing Zhihu into a virtuous cycle where quality content and commercialization mutually reinforce each other. High-quality content allows Zhihu to expand its user base at low cost while maintaining high levels of user engagement and loyalty.

According to the prospectus, Zhihu’s average MAU in Q4 2020 reached 75.7 million, an increase of 18.8 million compared to the same period in 2019.

The average number of monthly paying users on Zhihu was 3.026 million, a year-on-year increase of 189.8%. The user payment rate also increased from 1.8% in Q4 2019 to 4.0% in 2020, achieving a doubling growth.

Such a payment level is not easy to achieve in a general content community platform. Of course, Zhihu's current 4% paying user rate is still relatively low, leaving significant room for future improvement. After all, Bilibili's payment rate has already reached 8.9%, and with Bilibili's successful breakout case as a reference, Zhihu also has reason to take a step forward in terms of user scale and value.

On the creator side, by the end of 2020, Zhihu had accumulated a total of 43.1 million creators across the platform. In Q4, the average number of monthly active creators reached 3.3 million, producing 1,200 pieces of content in December alone. Meanwhile, by the end of December last year, the platform had cumulatively created 353 million pieces of content, with a compound annual growth rate of 64% over the past two years, of which 315 million were in Q&A format.

Currently, Zhihu has 100 creators earning over 100,000 yuan per month and 1,000 creators earning over 10,000 yuan per month. In 2021, Zhihu also plans to invest tens of billions of yuan worth of cash and traffic to further support creators.

A good community atmosphere, highly engaged users, and quality content form a network effect, leading to large-scale accumulation of original premium content, establishing the only large-scale knowledge production and sharing platform. In today’s internet landscape, such an ecosystem has become rare.

Although Zhihu initially started as a small group of professionals discussing specialized topics, similar to Silicon Valley’s Q&A community Quora, Zhihu is no longer an imitator. Quora’s CEO Adam D'Angelo has even joined Zhihu and asked: 'What are some aspects of Chinese internet companies that American internet companies can learn from?'

Today’s Zhihu has no equivalent product in the United States and is a unique presence in China.

Philosopher Bertrand Russell once summarized three passions of human beings: the longing for love, the pursuit of knowledge, and compassion for human suffering. As the socio-economic level gradually improves, the rise of knowledge sections on various platforms also confirms that people’s pursuit of knowledge is becoming increasingly important.

Zhihu's role has also become multidimensional: from the early core group of internet entrepreneurs, to professionals from various industries, to students and young people, and now it has gradually expanded to third- and fourth-tier cities and even more grassroots towns… Breaking out of its original circle to make knowledge more accessible aligns with broader societal development trends. The unique community atmosphere cultivated over time cannot be easily replicated by others simply by spending money.

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