Fourth Paradigm tries to shift investor perception with new platform launch

The AI company whose products help enterprises improve their efficiency said its revenue rose 28.5% in the first quarter

Key Takeaways:

• Fourth Paradigm said its first-quarter revenue rose 28.5%, while its gross margin slipped on higher R&D spending as it launched a new platform
• The company’s stock is undervalued compared with its peers, with its shares now down nearly 10% from their IPO price last September

By Doug Young

In the world of Chinese AI, it seems not all companies are created equal in the eyes of investors. Beijing Fourth Paradigm Technology Co. Ltd. (6682.HK) commands far less respect than better-known names like SenseTime (0020.HK) and CloudWalk (688327.SH), even though it has more revenue than those other two names and is growing quite nicely.

Part of the difference may owe to SenseTime’s and CloudWalk’s focus on computer vision AI, often used for surveillance, compared with Fourth Paradigm’s focus on more mundane technology that helps businesses boost their efficiency. Fourth Paradigm is hoping to breathe some new interest into its shares with the March launch of its newest Sage AI Platform 5.0, which the company detailed last week in its first-quarter business update.

Truth be told, none of China’s leading AI companies is attracting nearly as much investor interest as big foreign AI names these days. A big part of that owes to various U.S. restrictions, from bans on American investment in such Chinese companies to bans on the sale of advanced American technology like microchips and software – all part of an effort by Washington to stifle the Chinese industry’s development.

In Fourth Paradigm’s case, the company was added to an “entity list” maintained by the U.S. Commerce Department in March last year, prohibiting it from buying U.S. advanced technology without special permission from Washington. After that happened, U.S. investment banking giant Goldman Sachs withdrew as underwriter for the company’s planned Hong Kong IPO.

Despite that, Fourth Paradigm forged ahead with the listing, raising about $100 million when its shares debuted last September. They’ve traveled a bumpy road since then, even as the company posted solid double-digit revenue growth last year that continued into the first quarter. At its Wednesday close of HK$50.65, the stock now trades about 9% below its IPO price of HK$55.60.

The highlight of its first-quarter update was word of the Sage AI Platform 5.0’s launch in March, which presumably has the potential to sharply boost the company’s revenue growth later this year. “Sage AI Platform 5.0” can construct industry-specific large models with different modalities of data for various industry (scenarios), greatly expanding the application field of industry-specific large models and providing enterprises with sufficient supply of large models,” the company said in the update.

As an example, it said, the new platform could use AI to help a healthcare provider predict health levels of its patients over the next three years using existing data on those patients. The platform’s biggest advantage over earlier products appears to be its ability to provide industry-specific functions rather than more general functions to improve business efficiency.

Investors weren’t extremely excited about the new platform’s launch, with Fourth Paradigm’s shares falling 3.1% the day after the announcement. But the shares regained those losses and then some in the following days and were up 2.4% from pre-announcement levels by Wednesday’s close. Investors will inevitably be closely watching for updates in the company’s interim report to see how quickly the platform has gains traction.

Low valuation

While the new platform could become a major new growth driver, Fourth Paradigm isn’t getting much respect from investors – at least for now. The company’s stock currently trades at a price-to-sales (P/S) ratio of just 3.66, compared with nearly 12 for SenseTime. CloudWalk trades even higher with a P/S ratio of 17.5, though at least some of that owes to the company’s listing in Shanghai where such stocks are more highly valued than in Hong Kong.

Fourth Paradigm’s revenue rose 28.5% during the first quarter year-on-year to 828 million yuan ($114 million), according to the report. That figure looks generally quite respectable, though we should note it represents a slowdown from the 36% growth the company reported for all last year, when annual revenue reached 4.2 billion yuan.

Within the larger figure, revenue from the company’s 4Paradigm Sage AI Platform, which it calls its base platform for developing all models, rose 84.8% to 502 million yuan, accounting for 61% of its total in the first quarter. That was offset somewhat by a 14.6% decline in revenue to 249 million yuan for its SHIFT Intelligent Solutions business, used for more industry-specific functions.

Fourth Paradigm currently serves a number of key industries, including finance, energy and power, transportation and telecom operators. Its R&D costs rose to 42% of its revenue in the first quarter from 40% all last year, probably reflecting a ramp-up in spending for the rollout of the new Sage AI Platform 5.0. Such spending is the life blood of AI companies, and Fourth Paradigm’s spending level looks quite reasonable compared with SenseTime, whose R&D expenses last year were roughly 100% of the company’s revenue.

The strong revenue growth, combined with controlled R&D spending, helped Fourth Paradigm to boost its gross profit by 21% in the first quarter to 341 million yuan. But we should also note that its gross profit margin for the quarter slipped to 41.2% from 47.1% for all of 2023.

The company didn’t provide any net profit or loss figure for the first quarter, though it almost certainly continued to lose money like most of its peers. Its adjusted loss for all last year narrowed to 415 million yuan from 504 million yuan in 2022.

The company’s cash at the end of last year grew to 2.67 billion yuan from 2 billion yuan at the end of 2022, with the gain roughly equal to the money it raised in its IPO. That’s a relatively encouraging sign, showing the company is maintaining relatively strong cost controls and isn’t rapidly burning through its cash, unlike some of its rivals.

Fourth Paradigm also has a relatively diverse user base, consisting of 124 customers during the first quarter, including 54 core customers whose average spending during the period totaled 8.9 million yuan each.

At the end of the day, there’s really no glaring reason why Fourth Paradigm is valued so lowly compared with its peers, especially considering its strong revenue growth, disciplined R&D spending and focus on a relatively non-controversial area helping businesses improve their efficiency. Perhaps some strong initial results for its newest platform when it reports its first-half results might drum up some new investor interest in its underappreciated stock.

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