Tuya Focuses on Staying the Course in the Face of Global Turbulence

IoT platform as a service (PaaS) company blames inflation, chip shortage on bumpy demand from its core IoT device customers

Key Takeaways:

• Tuya reports its revenue grew 44.9% in the third quarter, as factors like high shipping prices and global inflation affected demand for smart internet-connected products
• Company’s shares look undervalued compared to peers, possibly due to political factors that look overblown

By Doug Young

We can’t control the global situation, but we’re working to improve our own shop.

That’s the key takeaway coming from IoT platform as a service (PaaS) provider Tuya Inc. (TUYA.US), whose newly announced quarterly results continue to show growth that remained strong but was also down from the first half of the year.

The company said multiple effects of the global pandemic, and government measures to counter those effects, are putting a crimp on demand for smart products like lighting and home appliances that are its customers’ bread-and-butter. Those products, which can communicate with their owners and get information over the internet, are collectively known as the “internet of things” (IoT).

“As we stand in the third quarter and look back at the first half of the year, the loose monetary policy brought a consumption boom … in the global market, covering up global supply chain issues caused by factors such as repeated pandemic outbreaks, chip shortages, and insufficient shipping capacity,” founder and CEO Jerry Wang said in remarks accompanying the results.

He added that in such an environment, consumers have less purchasing power and are prioritizing necessities over more discretionary items like IoT electronics. Presumably most of those factors are temporary, and the company could return to its old growth track within a year when conditions return more to pre-pandemic levels. But for now, at least, there’s plenty of turbulence.

Tuya posted third-quarter revenue of $85.6 million, up 44.9% year-on-year. While such a figure would be the envy of many companies, it was slower than the previous quarter’s rate. Its core IoT PaaS business, which makes up about 85% of its revenue, grew by 37.4%. That was partly offset by the company’s fast-growing software as a service (SaaS) business, which tripled to a relatively modest $5.6 million.

In its latest announcement the company also teased a new private cloud service that is in development has received expressions of interest from its customers, hinting at another potential new growth source.

It said it expects its fourth-quarter revenue to be between $72 million and $77 million, compared with $63 million a year earlier.

Despite its headquarters in China and foreign-sounding name, Tuya has been spending much of its time lately trying to show the world it’s a global company. Earlier this month it announced a new tie-up with Brazilian lighting company Gaya, just days after releasing a separate new report in partnership with Gartner, another well-known global market research firm.

Its customer base is quite global, split almost evenly in thirds between the U.S., Europe and the rest of the world, with a roster of big-name clients and partners that includes Google in the U.S. and telecoms service provider Orange in Europe. Orange Belgium has even commented on the broader security topic that has become a recent source of controversy, calling Tuya’s products “reliable and secure.”

Despite the global headwinds, the company continued to sign on new customers and developers during the third quarter. Both figures grew by about 15% from the end of June, with its core IoT PaaS customers reaching 3,000 and total developers at more than 446,000 by the end of September. Its gross margin also improved by 8.2 percentage points to 42.6%.

But a big jump in operating expenses – led by a roughly 150% increase in R&D spending – caused the company’s net loss to widen to $47.9 million from $13.2 million a year earlier. Tuya’s March IPO raised about $900 million and left the company relatively cash rich with $1.2 billion in its coffers at the end of September. So a cash crunch shouldn’t be among its worries anytime soon.

Unappreciated

The company’s stock rose 2.7% in regular Tuesday trading before the results were announced, and was largely unchanged in after-hours trade after the results came out.

Apart from global economic factors, the biggest challenge the company has faced following its listing has come on the political front. It came under attack in September from several U.S. politicians who accused it of posing a data security risk – claims Tuya quickly denied. That came as Beijing also starts to enforce its own data security law that has cast a cloud over other U.S.-listed Chinese firms like the Uber-like Didi Global and trucking services firm Full Truck Alliance.

While the global nature of Tuya’s customer base and server network should make it less affected by the Chinese data security law, it’s difficult to hear signals coming from it or any of these companies about their actual business with so much background noise.

Tuya sold its IPO shares in March at $21 apiece, and briefly saw them rise as high as $26.65 on bullishness about its strong growth prospects. But it has been mostly downhill from there, with the notable exception of a brief rally after the company announced a $200 million share buyback at the end of August. Since then it has bought back $28.6 million through the end of September, showing its own confidence in its future prospects.

Despite that, the stock now trades near an all-time low, and looks quite undervalued compared with its global peers.

The analyst community remains on Tuya’s side, probably because such analysts are more focused on financials rather than politics. Three of the eight analysts polled by Yahoo Finance rate Tuya a “strong buy” – one more than in the previous month. Another five rate it a “buy.” The group has an average target price of $14.40, nearly triple the stock’s recent trading levels.

While analysts typically set their targets above a company’s actual price, it’s quite rare to see such a major gap – indicating at least the financial pundits see the stock as significantly undervalued.

With a current market value of more than $3 billion, the company trades at a price-to-sales (P/S) ratio of 10, which would be relatively high for a mature company but is actually low for such a young player in a high-growth space. By comparison, data warehousing company Snowflake (SNOW.US) trades at a sky-high P/S ratio of 140, while web infrastructure and security provider Cloudflare (NET.US) is also significantly higher at 110.

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