What happened

Shares of Kingsoft Cloud Holdings (KC 0.87%) slumped on Friday, two days after the company reported its second-quarter earnings results. The Chinese cloud service provider was down as much as 13.8% on the day. As of 1:27 p.m. EDT, the stock is down 5.5%.

So what

On Wednesday, Aug. 25, Kingsoft Cloud Holdings released its Q2 earnings report. Revenue grew 41.6% to $336.7 million in the period, with its enterprise cloud segment growing a whopping 152.8% to $96.4 million in the quarter. While the top-line numbers looked good, Kingsoft Cloud Holdings has terrible gross margins. In Q2, gross margins were only 5.5%, meaning that the company only brought in $18.4 million in gross profit over the last three months. Compared to its market cap of $6.7 billion, those are not very good numbers.

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Kingsoft Cloud Holdings is also unprofitable. In the second quarter, it had an operating loss of $49.6 million, which was 25% better than the same period last year. With such low gross margins, Kingsoft Cloud Holdings will likely struggle to achieve profitability unless it really scales its business. 

Now what

Management is guiding for 49% to 56% year-over-year revenue growth in the third quarter of 2021. While these numbers look great, investors shouldn't get too excited. For one, if you do not understand the Chinese economy (like many Western investors), buying shares of Chinese stocks adds a layer of uncertainty compared to American businesses. And with Kingsoft having less than $20 million in gross profits generated last quarter compared to a market cap north of $6 billion, it is hard to find a reason why someone would want to own its shares, even if they understood the ins and outs of the Chinese economy.