Zhipu's stock has seen remarkable growth on the Hang Seng Tech Index this year, but this success raises concerns according to an industry expert. Felix Wang from Hedgeye Risk Management has recommended a short position on the AI company, estimating its fair value at HK$407, significantly lower than the current trading range of HK$1,400 to HK$1,500.
How did Zhipu go from IPO excitement to potential bubble?
Zhipu, known for its GLM series of large language models, launched on January 8 at around HK$116 per share. Less than six months later, its stock skyrocketed over 1,100%, reaching intraday highs above HK$1,600 in mid-June. However, analysts are beginning to question this meteoric rise, considering it a troubling indicator of a market bubble.
What impact did DeepSeek’s pricing strategy have on Zhipu?
In May, DeepSeek implemented a substantial 75% price cut on its V4-Pro model, leading to significant reductions in API costs. As a result, Zhipu faces a competitive environment where pricing power has been compromised. With deep-pocketed competitors actively slashing their prices, Zhipu's previous revenue projections, which were based on higher price points, are starting to falter.
Did index inclusion help Zhipu stabilize its stock?
Zhipu received an important boost in June by being added to the Hang Seng Tech Index, alongside another firm, MiniMax. Inclusion in such indices often leads to increased passive buying by funds that track these benchmarks, providing a temporary lift in stock prices independent of the company’s actual financial health. In conjunction with the release of its GLM-5.2 model, this bolstered share prices after a decline earlier in April due to intensified competition.
What challenges remain for Zhipu?
While the index inclusion offered short-term relief, this is a one-time boost. Once the impact of passive inflows dissipates, Zhipu must demonstrate its worth based on real performance. The open-sourcing of its model, although beneficial for ecosystem development, does not directly address the cash flow challenges highlighted by industry analysts.
For investors, the implications are significant. Wang's valuation suggests that Zhipu could decline by approximately 70% from current highs to meet his target price, raising concerns among stockholders. Investors in Zhipu or other Chinese AI stocks should focus on sector pricing trends. If competitors continue to lower API prices, the entire valuation landscape for companies like Zhipu may need a complete reevaluation. To justify its exorbitant valuation—over ten times its IPO price—Zhipu must not only deliver impressive results but do so in an environment where its products are becoming increasingly commoditized.