In just two years, the stock price of iFLYTEK (002230.SZ) has undergone a dramatic transformationThe fluctuations that this company has experienced, particularly in the dynamic landscape of the technology sector in China, illustrate the volatile nature of the market. In mid-2023, iFLYTEK faced a significant downturn, with a stunning drop of more than 70% from its peakHowever, by September 2024, the narrative shifted as the stock surged, climbing over 70% once more, and its market value approached 130 billion RMBFor its nearly 360,000 shareholders, this turnaround could not have come at a better time.

What lies behind iFLYTEK's recent resurgence? The answer points squarely to AI large models, which are dominating discussions in the A-share market.

In recent months, the prominent storyline in China's stock market has been the speculative excitement surrounding the AI industryAs a notable player in the sector, iFLYTEK stands out in A-share as a relatively rare commodity familiar with large AI modelsThis rarity is particularly striking given the explosion of AI models from various tech giants since the launch of ChatGPT at the end of 2022. Major corporations, like ByteDance, Huawei, Tencent, Baidu, and Alibaba, have all entered the competitive field with their own AI modelsMeanwhile, competitors such as Kimi from Yuanzhihanyue and DeepSeek have also generated substantial buzz following their releases.

The concept of 'scarcity' becomes relevant hereCompanies like "BAT" (Baidu, Alibaba, Tencent) are publicly listed in the US or Hong Kong, while others such as Huawei, ByteDance, and Yuanzhihanyue are still privateThis results in a very limited number of companies focusing on large models within the A-share market, with only a few players, including iFLYTEK and 360 Security Technology, considered industry leaders.

Diving deeper into iFLYTEK, two distinguishing advantages can be highlighted:

Firstly, iFLYTEK boasts end-to-end self-control

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This "self-containment" uniquely positions iFLYTEK compared to its competitorsThe largest shareholder of iFLYTEK is China Mobile, which supports the company's strategy of focusing on core capabilities that are autonomous and controllable, particularly in fields dedicated to public needs.

From the outset, iFLYTEK partnered with Huawei to utilize their GPUs and committed to training its large models on domestically sourced computing platformsCurrently, the "Xunfei Xinghuo" remains China’s only large model trained entirely on a national computing infrastructure meant for public useAs AI emerges as a critical battleground in the ongoing technological rivalry between China and the US, maintaining control over the foundational models can help mitigate risks associated with technological dependencies.

Secondly, the company is focused on niche vertical marketsWhile many may not recognize the name of iFLYTEK’s large model, its concentration on specialized sectors has forged a unique competitive edge.

The company has developed various consumer hardware products powered by its AI models, including devices for learning, office productivity, and healthcareFor example, its AI learning machines have seen tremendous sales, especially during the high-demand sales events such as "Double 11" in 2024, where iFLYTEK's devices achieved top sales in six categories on platforms like JD.com and Tmall, with revenue increasing by 65% year-over-year.

Moreover, iFLYTEK has released industry-specific large models, collaborating with state-owned enterprises like China National Petroleum and China Mobile, as well as leading firms across more than 20 sectorsIn 2024, the company proudly announced its achievement as the leader in large-model applications among state-owned and national enterprises, realizing both the highest number and value of contracts.

Nonetheless, despite its promising growth and dominant market presence, iFLYTEK grapples with several operational challenges now more than ever.

On the financial front, the company's condition is concerning

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In the first half of 2024, it reported a loss of about 401 million RMB, and although a slight profit of approximately 56.96 million RMB was recorded in the third quarter, this figure included government subsidies amounting to 90.72 million RMB; without this, iFLYTEK would still be in the red.

At the end of the third quarter, the company's cash reserves plummeted to 2.751 billion RMB, marking a decrease of over 800 million RMB since the beginning of the yearMeanwhile, accounts receivable have risen significantly, leading to a concerning increase in short-term and long-term debts, with the cash ratio dropping to a meager 19.23%, the lowest since its public listing—raising alarms about their ability to meet obligations.

If profitability does not improve, iFLYTEK might need to explore fundraising options like issuing new shares to bolster its financesThis pressure to turn a profit is a well-known challenge across the large model industry.

Globally, no large model company has yet succeeded in establishing a sustainable business modelFor instance, OpenAI's ChatGPT boasts weekly users exceeding 400 million and expects revenue of 3.7 billion USD for 2024 but stands to lose a staggering 5 billion USDSimilarly, DeepSeek has gained immense popularity by offering its technology for free, with no immediate plans to generate revenue.

The current landscape of large models is characterized by a 'burning money' competitionAlthough DeepSeek has drastically reduced training costs for AI, the final measure of success ultimately remains in the competition of computing power, which necessitates continuous investment in high-performance chips.

With heavyweights like Huawei, ByteDance, Baidu, Tencent, and Alibaba dominating the Chinese market, each backed by substantial financial resources, and given that DeepSeek is linked to the quantitative organization Huanfang Technology—which likely does not face funding issues—iFLYTEK finds itself in a precarious financial habitat.

The future of iFLYTEK, while displaying a remarkable upward trend, raises many questions about its sustainability in an era where competition is fierce and financial viability is critical.

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