Company’s shares have tumbled more than two-thirds from a February high on concerns related to its China roots

Key Takeaways:

  • Agora’s latest quarterly results show shortfalls in its earnings and margins due to rising expenses
  • A year after a sparkling IPO, company’s stock has been hobbled by high-profile setbacks related to audio chat app Clubhouse and education giant New Oriental

By Eric Auchard

Agora Inc. (API.US), the Silicon Valley-based interactive video toolmaker with Chinese roots, was riding high, growing in myriad markets that powered a quadrupling of its stock between its June 2020 IPO and early this year. But its machinery has started to sputter, as Agora’s second-quarter earnings report released this week exposed sizeable cracks in its surging growth story.

For the first half year after its IPO, everything seemed to be going swimmingly for Agora’s technology that lets popular social, education, entertainment and gaming apps embed real-time video and voice-engagement features. Its stable of paying customers doubled in 2020, and revenues grew by triple digits. As that happened, the company’s first profits emerged.

The company also got a brief turbocharge at the start of this year when its name was associated with the craze for audio chat app Clubhouse that swept the globe, lifting its shares to more than $100 – more than five times their $20 IPO price. A report at the time showed that Clubhouse web traffic was being directed through Agora’s servers in China, though the pair never actually confirmed their relationship.

But at least for now, Agora’s hopes have been dashed by issues at its high-profile customers. While still popular, Clubhouse has come under fire for potentially exposing its user data to Chinese scrutiny through its Agora connection. Meantime, another big-name Agora customer, education services giant New Oriental, has gotten caught up in Beijing’s recent crackdown on after-school tutoring services.

Those and other similar developments showed up in its earnings report released this week. Revenues grew 24% to $42.3 million, modestly topping expectations. But its loss of $0.14 per American depositary share (ADS) was 9 cents worse than analyst forecasts. Gross margins also slid 5 percentage points to 61.1% as hiring costs and stock-option expenses ballooned.

The new reality led Agora to cut its revenue outlook to between $159 million and $161 million for all 2021, below the prior consensus forecast above $171 million.

Investor reaction to the shortfall was relatively muted, as shareholders have already gotten used to the former highflyer’s new reality.

Following their February peak, Agora, which is based both in Silicon Valley and Shanghai, started coming under fire for using its China-based servers to route Clubhouse’s data. At that time it also got hit by additional criticism over gaping holes in its encryption. Agora responded by saying it doesn’t store any user data, and it leaves encryption up to its customers

But the damage was done, and Agora shares slid from their Clubhouse-hype high of $106 in early February to the $60 range by the end of that month. More recently the stock has slid further on Beijing’s crackdown on the country’s $120 billion after-school tutoring sector, which has hammered education shares even more than Agora’s.

New Oriental, one of China’s oldest and largest private extracurricular education providers, was believed to be a major customer previously featured in Agora’s financial filings. Its IPO prospectus last June said an unnamed “educational institution application” was responsible for 14% of its revenues in the first quarter of 2020, making it the company’s biggest client by a wide margin.

Investors dumped shares as momentum behind the education crackdown grew throughout the year, and the stock now trades below $30.


Agora has generally remained tight-lipped on the names of its biggest customers and what industries and markets they come from. But it hinted at its top two markets when an executive said on its results conference call this week that the U.S. is “stop one,” after China.

At the end of 2020, Agora said it had 2,095 active customers, defined as those generating more than $100 of revenue during the preceding 12 months. But the reality is that its top 10 customers and their subsidiaries accounted for 37.4% of its revenue last year, according to its 2020 annual report.

That concentration of business in a small group of customers – a relatively common problem for many smaller companies – contrasts with Agora’s stated strategy of getting rich by supplying the picks and shovels needed by thousands of app operators to mine internet gold.

As a pioneer and global market leader in its area, Agora has wowed investors with its story of getting rich off the growth of those thousands of customers. Networking equipment maker Cisco played a similar role in the early internet days, and hot U.S. IPO prospect Stripe is now doing something similar to help developers plug payment features into their own apps.

But perhaps the best comparison is Twilio, which shares a similar business strategy with Agora as a provider of communications tools to app developers. Twilio, whose customers include Airbnb, Gojek, Lyft and Twitter, currently commands a market value 20 times larger than Agora, and its shares have enjoyed a 14-fold increase since its IPO five years ago.

While both Agora and Twilio are losing money, Agora carries a lower price-to-sales (P/S) ratio of 23, compared with Twilio’s 29. Another peer, voice-over-internet pioneer 8×8, trades at a far lower P/S of 5 times after posting years of losses.

But peer comparisons based on stock market valuations don’t really begin to tell the story of Agora’s potential. Inspired by the Greek name for an open gathering space, Agora was founded in 2013 as a maker of technology for embedding video and audio chat features allowing app users to interact with one another.

Its founder and Chairman Zhao Bin, who also goes by Tony Zhao, is one of the pioneers in audio and video transmission over the Internet. Zhao was a founding engineer at Webex, which was later acquired by Cisco. He was also previously CTO of Nasdaq-listed social networking and online karaoke site YY Inc., which like Webex, developed technology enabling real-time video and voice engagement.

Despite its high-profile setbacks this year, Agora has signed deals to serve as the video back-end software provider for gaming apps from Taiwan smartphone maker HTC and computing giant HP. Software outsourcing giant Wipro is also using Agora video to connect its employees and customers via real-time video and, when desired, augmented reality.

With that kind of pedigree and growing stable of big-name customers, it seems like only a matter of time before Agora’s results will rebound. But for now, at least, it seems many investors aren’t waiting around for that to happen.

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