Cloopen’s Sinking Stock Defies Fundamentals, Lawyers

Cloud services provider’s stock has lost half its value since its strong February IPO, despite solid performance in its post-listing reports

Key takeaways:

• Cloopen’s growth appears stable and may even be accelerating as it gains a foothold in China’s lucrative cloud services market
• A sharp decline in the company’s stock post-IPO has left many scratching their heads, including two shareholder lawsuit specialists

By Doug Young

There’s plenty of mystery surrounding stocks trading on China’s domestic markets in Shanghai and Shenzhen, where rumor and behind-the-scenes manipulation often play as big or even a bigger role than company fundamentals. New York- and Hong Kong-traded Chinese stocks are typically less prone to such forces, since those markets are better regulated and are dominated by more sophisticated institutional buyers.

But that law of the jungle is being tested by Cloopen Group Holding Ltd., a provider of cloud-based services that was one of this year’s biggest IPOs by a Chinese company when it listed its shares on the New York Stock Exchange in February.

Last week the company released its first-quarter results, markingits second such quarterly announcement since the listing. We’ll review the figures shortly, but we can quickly summarize by saying the company posted relatively solid growth and forecast more of the same in the current quarter. It continued to lose money, though not at an alarming rate.

And yet despite that, the company’s shares have fallen about 14% since the announcement exactly a week ago. That might sound worrisome in other cases. But in the case of Cloopen, the company’s stock has moved steadily downward since a huge pop on its first trading day in February.

The company raised $320 million in the listing by selling its American Depositary Shares (ADSs) at $16, giving it a market value of $2.6 billion. That looked quite strong, since the fundraising total was quite large and the price was above the previously announced range of $13 to $15. What’s more, the stock tripled on its first trading day to close at $48.

But it’s been all downhill since then, at least in terms of the company’s stock. Much of the first-day gains disappeared quickly, which isn’t that surprising since such gains are often fueled by hype. The stock continued to steadily lose ground even after that, and fell below its IPO price in late March. The decline has been relatively gradual, though there was a week between March 19 and March 26 where it mysteriously lost half its value.

At its current level it now trades at about half its IPO price.

Law firms that can normally sense when something’s amiss at a publicly listed company have largely steered clear of Cloopen. Two have said they are considering class action lawsuits, though a closer look shows they seem to be equally clueless about Cloopen’s incredible shrinking stock and are looking for enlightenment from investors.

The first notice, issued by the Schall Law Firm on April 13, vaguely asserts that it’s looking into “whether Cloopen issued false and/or misleading statements and/or failed to disclose information pertinent to investors.” The second, filed by Bronstein, Gewirtz & Grossman, was issued on May 19. It similarly says the firm is trying to determine “whether Cloopen issued false and/or misleading statements and/or failed to disclose information pertinent to investors regarding its February 2021 initial public stock offering.”

Solid Results

With all that stock volatility in mind, we’ll zoom in on Cloopen’s latest earnings that look relatively solid and lacking in any red flags.

The company posted 204.5 million yuan ($32 million) in revenues during the year’s first quarter, up by a relatively solid 54.4% from a year earlier and beating its own previous guidance for 192-197 million yuan given in its previous quarterly results. It did forecast a slowdown to about 40% revenue growth in the current quarter. But we should note that both rates are better than the 30% growth it reported for all of 2019 and the 18% growth it reported for 2020.

The company’s first-quarter net loss widened to 171 million yuan from 47.7 million yuan a year earlier. But much of that appears to be related to share-based compensation, and on a non-GAAP basis the loss widened by a smaller margin to 63 million yuan in the most recent quarter from 55 million yuan a year earlier.

A deeper dive into the company’s report and its earnings call turn up more of the same in terms of lack of alarm bells. The company’s customer base continues to expand and the growth even appears to be accelerating, with active customers reaching 13,109 at the end of March, versus 13,039 at the end of last December and “more than 12,000” at the end of last September.

The company operates in the hot market for cloud services, though it’s clearly a bit player behind giants like Alibaba, Huawei and Tencent. In its IPO prospectus, it said China’s cloud-based communications industry where it operates was worth 35.7 billion yuan in 2019 and was expected to grow about 23% annually to reach 101.5 billion yuan by 2024.

Following the steady decline of its stock, Cloopen now trades at a relatively low price-to-sales (P/S) ratio of 11. Data center operators Chindata Group and GDS Holdings, which come from a roughly comparable area since their facilities are mostly used to host cloud services, have significantly higher P/S ratios of 20 and 17, respectively.

The only other post-IPO news from Cloopen was its purchase of a customer relationship management (CRM) software provider called EliteCRM announced on March 10 for an undisclosed price. Its possible people may suspect insider dealing with that purchase, though there were no media reports to that effect. And the fact that no price was disclosed means that Cloopen thinks the purchase wasn’t significant in relation to its overall finances.

The company also failed to file its first annual report by a regulatory deadline of April 30. But the fall from compliance was quite brief, and it ultimately filed the document on May 10.

At the end of the day there’s really no fundamental-based reason for the steady and major decline of Cloopen’s stock in the four months since its IPO. That means it could present a good buying opportunity if one believes it’s the same company that was valued twice as highly at the time of its February listing.

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