Tuya Seeks Growth But Produces Higher Operating Losses

A Quick Take On Tuya

Tuya (NYSE:TUYA) went public in March 2021, raising approximately $915 million in an IPO that was priced at $21.00 per ADS.

The firm provides cloud-based infrastructure in China for Internet of Things services and applications to companies worldwide.

Given the uncertainties of Tuya's revenue growth as a result of the continuing lockdowns in China and its worsening operating results, until management can demonstrate a meaningful turn toward operating breakeven, I'm on Hold for TUYA in the near term.

Company

Hangzhou, China-based Tuya was founded to develop a Platform-as-a-Service (PaaS) cloud offering to enable developers to build and host their Internet of Things (IoT) applications.

Management is headed by Founder and CEO, Xueji Wang, who was previously a Senior Director at Alibaba and was responsible for launching a number of initiatives at Alipay.

The company's primary offerings include:

• Internet of Things Platform-as-a-Service

• Industry Vertical Software Solutions

• Cloud-based Services

The firm pursues customer relationships with businesses and OEMs primarily in the consumer IoT industry.

However, management has been expanding its efforts into a variety of other vertical sectors.

In 2020, the company 'powered over 116.5 million devices via IoT PaaS, making us the world's largest IoT cloud platform in the global market of IoT PaaS, according to CIC.'

Market & Competition

According to a 2020 market research report by Mordor Intelligence, the global market for IoT was valued at an estimated $761 billion in 2020 and is expected to reach $1.39 trillion in value by 2026.

This represents a forecast CAGR of 10.53% from 2021 to 2026.

The main drivers for this expected growth are an increasing adoption of IoT technologies across a wide range of industry verticals, including automotive, manufacturing and healthcare.

Also, a shift to manufacturing 'Industry 4.0' is placing an emphasis on complementing and augmenting human labor with robotics to reduce accidents and increase efficiencies.

Regional growth rates are estimated in the chart below:

Major competitive or other industry participants include:

• Amazon AWS (AMZN)

• Alibaba Cloud (BABA)

• IBM (IBM)

• Microsoft (MSFT)

• Google (GOOG)

TUYA's Recent Financial Performance

• Topline revenue by quarter has grown unevenly over the past 5 quarters:

• Gross profit by quarter has followed roughly the same trajectory as topline revenue:

• Operating losses by quarter have worsened sharply:

• Earnings per share (Diluted) have also remained strongly negative:

(Source data for above GAAP financial charts)

In the past 12 months, TUYA's stock price has dropped 87.9 percent vs. the U.S. S&P 500 Index's rise of .55 percent, as the chart below indicates:

Valuation Metrics For Tuya

Below is a table of relevant capitalization and valuation figures for the company:

(Source)

Commentary On Tuya

In its last earnings call, covering Q4 2021's results, management highlighted its revenue growth, which was 68% over that of 2020.

Additionally, CEO Jerry Wang noted that its customer base rose from 5,000 in 2020 to around 8,400 by the end of 2021, representing growth of 68% over the previous year.

The firm also grew its large customer segment, those who purchase more than $100,000 per year in services, from 188 in 2020 to 311 in 2021. The annual retention rate of its top 100 IoT PaaS (Platform-as-a-Service) customers also finished the year at 99%.

However, the company faced international logistics supply chain disruptions which likely slowed its growth and increased costs, but Tuya produced increased gross profit margin.

As to its financial results, while topline growth and gross margin growth have been impressive, its operating losses have increased sharply.

The company continues to invest in R&D employee headcount, which was up by 56% by year end. Operating in a fast-moving technology space means the firm will likely have to keep its R&D at a high level, impacting its financial operating results.

In the current U.S. market environment of higher interest rates, companies with worsening losses and no credible path to operating breakeven have been punished severely and TUYA has been no exception.

Cash used in operations has also greatly increased, which can be a primary driver for lower valuations by stock market investors despite the company's growth results.

However, Tuya ended 2021 with just over $1 billion in cash, equivalents and short-term investments which is certainly enough to provide the company with ample runway.

Management expects Q1 to be its seasonally strongest quarter, but this year, that is a question mark due to the Covid-19 outbreak in the Shenzhen and Shanghai regions.

The firm recently provided estimated Q1 2022 total revenue results of between $54 million and $55 million (midpoint of $54.5 million), which was slightly higher than its year-end 2021 expectation of between $50 million and $57 million (midpoint of $53.5 million).

Given the uncertainties of Tuya's revenue growth trajectory as a result of the continuing lockdowns in China and its worsening operating results, until management can demonstrate a meaningful turn toward operating breakeven, I'm on Hold for TUYA.

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