With its unique community culture and traffic distribution mechanism, Xiaohongshu has achieved significant growth in users and advertising revenue, but the sustainability of its business model, the challenges of e-commerce business, and user consumption habits have made it face similar market tests to Bilibili, and its future development prospects have attracted much attention.
The competition in the Internet industry has come to the second half, and unicorns that have not yet been listed are generally facing the problem of a sharp reduction in valuations, but Xiaohongshu has become an exception.
Bloomberg reported that a recent internal document submitted by GSR Venture Capital shows that GSR Phase IV Fund holds shares in Xiaohongshu 8. 47%, corresponding to a market capitalization of about $2.2 billion. According to this calculation, Xiaohongshu’s latest valuation should be around $26 billion, a 30% increase from the $20 billion valuation when the old shares were transferred in January this year.
Compared with Himalaya’s investors who no longer “raise a glass to celebrate” and no longer run away and bleed away, Xiaohongshu’s external investors are reluctant to let go, even if they are cashing out at a high level.
According to a report by Bloomberg at the beginning of the year, Xiaohongshu’s major shareholders have discussed the matter of reducing their holdings, and existing shareholders such as Tencent, Sequoia China, and Hillhouse are interested in taking over, while GSR Venture Capital, which also holds old shares, said that Xiaohongshu is expected to become one of its highest-yielding projects.
Some believe that this is because Xiaohongshu’s financial situation may be more optimistic than the market expects, and the IPO is also on the agenda. Xiaohongshu’s capital story in the second half of China’s Internet industry seems to be about to come.
01 Traffic
Xiaohongshu’s latest large-scale outing of the circle is due to the influx of “Tik Tok refugees”.
In January 2025, the U.S. government demanded that TikTok be divested from parent company ByteDance by January 19, otherwise it would be completely banned. This results in 1. 700 million American users are forced to look for alternative platforms, and many choose to express their dissatisfaction with US policies by “defecting to Chinese platforms”.
Xiaohongshu has adjusted the video interaction design (such as the position of the like button and the layout of the waterfall) before this, which is highly similar to Tik Tok and supports global mobile phone number registration, which is obviously ready to undertake the migration of users and splashing traffic.
Xiaohongshu has opened internationalization through user migration
This kind of preparation is useful, and on January 13, Xiaohongshu’s ranking soared from 209th to 2nd place in the US App Store, and on the 14th, it topped the free list, becoming the first app with an all-Chinese character name to top the US list. In the following week, Xiaohongshu topped the download list in 87 countries around the world, with 3.84 million new overseas users.
Although the Tik Tok ban was later extended three times, there were still some overseas users who really stayed in the community. The foreign language comments that appear from time to time in Xiaohongshu’s Chinese posts are the footprints left by these overseas users – although this retention rate is not high.
The core disk of Xiaohongshu is still in China, and the traffic of this part of the user itself is also growing rapidly. According to Aurora data, as of November 2024, Xiaohongshu has 3 monthly active users. 300 million, an increase of 56 million and 63 million in October and November 2024, respectively, an acceleration from the average monthly active growth of 30 million in normal months.
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On the one hand, this growth stems from Xiaohongshu’s unique community culture and content ecology. The Xiaohongshu community is mainly based on ordinary user-generated content, with a variety of content forms, integrating video, graphics, live broadcast, voice and other content forms, and precising rich content in many fields including lifestyle, fashion, food, etc., with a strong “sense of life”.
Moreover, Xiaohongshu performs well in vertical content, and the life cycle of notes can be as long as 3-6 months, which is much higher than Douyin’s “short and fast” traffic. For example, a note on the platform called “Minimalist Desk Transformation” still brings an average of 2,000+ clicks and 50+ conversions per month after its release 2 years later.
Another aspect of monthly active growth comes from Xiaohongshu’s mature traffic distribution mechanism. This set of mechanisms and algorithms attaches importance to indicators such as click-through rate, interaction rate, completion rate, and interaction value, and an effective new drainage algorithm can help new users quickly integrate into the community and make the user ecosystem more active.
Therefore, Xiaohongshu’s traffic is very commercially valuable, especially this kind of traffic is highly tied to female users. In addition to Tik Tok refugees, for advertisers, Xiaohongshu is also an option that is not inferior to Douyin.
“All Signals of Change: 2025 Private Domain Trends White Paper and Annual Research Report” shows that major brands and merchants are willing to invest on the three major platforms, although Tencent and WeChat ecosystems are still 33. 69% ranked first, but Xiaohongshu ranked 23. 82% surpassed Douyin’s 23. 55%, advancing to second place.
For comparison, in 2023, this ranking is the first WeChat (32%), the second Douyin (25%), and the third Xiaohongshu (21%), and Xiaohongshu’s status has risen significantly.
02 Pragmatic
Predictably, advertising revenue has always been Xiaohongshu’s most important source of revenue, especially before its e-commerce business did not gain a foothold.
In 2021, advertising revenue accounted for 80% of Xiaohongshu’s total revenue; In 2022, Xiaohongshu will assign the e-commerce department, which was originally a first-level department, to the community department; In 2023, Xiaohongshu will integrate its e-commerce business and live broadcast business, and form a new trading department, becoming a first-level department parallel to the community department and the commerce department.
Xiaohongshu’s financial situation also achieved a historic breakthrough in 2023, turning losses into profits for the first time, achieving operating income of $3.7 billion, an increase of 85% year-on-year, and net profit of $500 million.
But what if it is profitable? Whether Xiaohongshu can continue to make profits, whether the business model is effective for a long time, and whether the giants will attack Xiaohongshu that encroached on the territory are all questions that the market will ask.
The core of Xiaohongshu’s commercial ecological operation is “grass planting”, first attracting users through high-quality content, merchants following, and then monetizing advertising revenue in the merchant grass planting link, and the main business is to buy advertising space for merchants/cooperate with Xiaohongshu to promote products.
In the user “weeding” link, users purchase goods through the platform, merchants receive GMV revenue, and Xiaohongshu charges basic technical service fees and payment channel technical service fees proportionally. Through this cycle of “planting grass and pulling weeds”, Xiaohongshu monetizes traffic through advertising and e-commerce models, thereby opening up the commercial ecology.
Although the idea of commercialization is good, the reality is that most users will use Xiaohongshu to find product tips and then turn to traditional e-commerce platforms such as Tmall to make purchases.
Because Xiaohongshu’s supply chain system has not yet been established, it faces the dual constraints of category and quality, and the disadvantages in terms of timeliness and cost are also very obvious. And this kind of infrastructure can not “skyrocket” like traffic, and whether Xiaohongshu’s financial situation can support the huge investment in e-commerce infrastructure is actually a big problem.
It seems that Xiaohongshu, which is vigorously developing its e-commerce business, did another surprising thing before this 618 – launching the “Red Cat Plan” and “Hongjing Plan”, opening up the external link of notes to Alibaba and JD.com, and opening up the traffic pool.
In the past, although Xiaohongshu had cooperated with e-commerce platforms, it has always been relatively resistant to opening external links. Now that Xiaohongshu has finally opened up the ability of global notes to jump to e-commerce giants, I am afraid that it still wants to quickly realize traffic monetization, alleviate revenue pressure, and tell investors some stories – this is a more pragmatic survival strategy under the pressure of industry competition.
But whether Xiaohongshu users will buy it, the market is still unknown. After all, direct external links are likely to destroy the tone and authenticity of UGC, causing users to resist hard and wide. Even if users do not resist hard and wide, they are likely to choose to jump directly to external e-commerce instead of choosing Xiaohongshu’s self-operated e-commerce.
Bilibili stock price performance (2021-present)
In fact, the uncertainty of the commercialization path is also the core bottleneck that prevents most Chinese Internet companies from going public. If the commercialization is not good, even if it is listed by chance in the first few years of the Internet boom, the stock price is usually not too optimistic, and Zhihu and Bilibili are typical representatives of it.
Coincidentally, the valuation method for Xiaohongshu is now divided into two major schools, the first level looks at Baidu, and the second level looks at Bilibili.
03 Bubbles
A very important reason why Bilibili’s valuation has fallen by 85% from its peak is that its core users are “much more difficult to deal with” than imagined, and their willingness and ability to consume are questionable.
The core users of Bilibili are Generation Z, and they are mainly men aged 18-30, with an average daily usage time of up to 106 minutes, and the 12-month retention rate of regular members is as high as 80%, which seems to be extremely sticky.
At the same time, these users are proud of the community spirit of “generating electricity with love” or “free prostitution”, and excessive commercialization is regarded as a betrayal by them, and they have a strong resistance to hard broadcasting and live broadcasting. Because these users have become accustomed to expressing their support through free methods such as barrages and comments, they have formed an invisible resistance to direct payment behavior.
Source: Bilibili official website, Huaxin Securities Research Institute
Putting aside the unique community culture of Bilibili, the consumption power of Generation Z itself has not met the market’s optimistic expectations at all, which has been verified in the past market. Investors can’t just see the success of LABUBU and think that all tracks for young people are full of gold.
The biggest problem of Gen Z is insufficient savings, which constrains their spending power. The average savings of Generation Z in the United States can only cover half a month’s living expenses, and the expenditure is twice that of savings; Although China’s Generation Z has a savings rate of 28% on the surface (an average of 3,200 yuan per month), it holds 4 per capita. 7 credit cards, the actual anti-risk ability is not high.
In the context of intensifying downward pressure on the economy and increasing uncertainty in the general environment, the consumption behavior of Generation Z will also become more rational. They are good at comparing information through social media, evaluation videos and user reviews, avoiding impulsive purchases, and finding the most cost-effective places to spend.
What investors need to know clearly is that pleasing consumption and paying for interests are never the opposite of careful budgeting, let alone the synonym of being stupid and having a lot of money.
The problems faced by Xiaohongshu also have many similarities with Bilibili. The proportion of post-95s in Xiaohongshu’s monthly active users has reached 50%, and although the situation of female users may be more suitable for commercialization than that of male users, they essentially have to face the structural conflict between community genes and business efficiency.
Female users consume more frequently, but the categories are concentrated in beauty, mother and baby, and are price-sensitive, so it is more necessary to solve the problem of supply chain shortcomings and user price comparison habits. If the problem of commercialization cannot be solved, then Xiaohongshu’s valuation needs more reference to Bilibili.
In fact, not only the Internet unicorns that have not yet been listed are under valuation pressure, but the Internet giants that have been listed are also facing market controversy.
Looking back at the results of the first quarter of this year, although the profit level of most Internet companies is in line with or better than market expectations, it still raises market concerns, mainly because the visibility and certainty of profit growth are declining due to the intensification of competition in trading platforms.
As of the beginning of 2025, the PE (TTM) of the Internet sector of Hong Kong stocks is only 17. 68 times, in the past decade3. 61% quantile, significantly lower than the Nasdaq 100’s 37. 41 times. Instead of achieving the “winner-takes-all” of their American counterparts, China’s Internet giants have fallen into Chinese-style involution.
The business boundaries are blurred – those who do takeaway can do e-commerce, those who do e-commerce can also do takeaway, and the means of competition are homogeneous – each is engaged in tens of billions of subsidies, and everyone is doing members, but the valuation of the entire sector has never returned to its peak, and capital has actually changed its thinking, but it seems that only Xiaohongshu has higher expectations.
In this case, even if Xiaohongshu’s IPO is successful, it may be difficult for investors to really exit with a smile.
