Tuya’s losses narrow, but stock still looks pricey

The internet of things services provider’s gross margin hit a record high last quarter and its loss narrowed on strong performance for its platform as a service business

Key Takeaways:

• Tuya’s revenue jumped 42.2% in last year’s fourth quarter, with its platform as a service business as the biggest contributor
• The company’s stock could be vulnerable if major shareholder Tencent decides to sell down its stake, or if the company gets caught in a flareup of China-U.S. tensions

By Bai Xinrui

Internet of Things (IoT) platform as a service (PaaS) provider Tuya Inc. (TUYA.US; 2391.HK) had a good run last year when its shares soared 33.5%, making it a rare offshore Chinese stock to post gains for the year. The road has become bumpier with a 10% loss for the shares so far this year, even as Tuya recently reported sharply higher revenue and narrowing losses in its latest financial report for last year’s fourth quarter.

peers. As the world’s largest operator of a platform for services related to the internet of things (IoT), Tuya boasts a market share of 16%. It assists traditional OEMs and brands by hosting IoT functions for their products using cloud infrastructure provided by companies like Amazon’s AWS, Microsoft’s Azure and Tencent Cloud.

It operates in a fast-growing market where the number of global IoT connections exceeded 11.3 billion in 2020, and was expected to grow as much as 21.8% annually from 2021 to 2025, according to IoT Analytics. As the number of such connections continues to rise, Tuya could be well positioned to rise as well. 

Second child

Founded in 2014, Tuya is the second entrepreneurial endeavor of Jerry Wang, a veteran of e-commerce giant Alibaba (BABA.US; 9988.HK). Wang developed PHPWind, a popular general-purpose forum program acquired by Alibaba in May 2008 when he was still a student at Zhejiang Sci-Tech University. He later joined Alibaba and became the first general manager of Alibaba Cloud, developing the platform into a leader in China’s cloud computing industry.

Wang left Alibaba in 2014 with his PHPWind co-founders and Alibaba colleagues Leo Chen and Zhou Ruixin to found Tuya. The company aimed to hasten the intelligent transformation of products by providing its services to property managers, hotels and offline businesses. The company quickly took off and even became a core strategic partner of Google Home worldwide in 2017, as it built up its business helping companies facilitate products and services that communicated over the internet.

Its Alibaba ties aside, Tuya also counts another Chinese tech giant, Tencent (0700.HK), as one of its most important shareholders. That pair have an in-depth partnership in the cloud business, with Tencent Cloud supporting Tuya’s infrastructure as a service (IaaS) product offering. 

Global edge

Huatai Securities reported last year that, compared with the IoT platforms operated by Chinese rivals Xiaomi (1810.HK), Huawei and Haier Smart Home (6690.HK; 600690.SH; 690D.DE), Tuya is seen as the most independent in terms of its brand, and offers a full range of services over its relatively open architecture. That gives Tuya an edge over its domestic rivals by allowing it to provide services for companies both at home and overseas.

The company’s recently released quarterly report shows its loss narrowed by 52.4% year-on-year to $10.8 million in last year’s fourth quarter, while its revenue rose 42.2% to $64.4 million. Its platform as a service (PaaS) business was its biggest breadwinner, rising 44.6% to $47.2 million during the quarter, accounting for nearly three quarters of its revenue. The company’s SaaS business rose 19.3% year-on-year to $9.5 million.

It’s worth noting that Tuya’s gross margin hit a record high in the latest quarter, rising 2.7 percentage points year-on-year to 47.3%. Its PaaS margin rose 3.3 percentage points to 44.8% thanks largely to changes in its product mix and “enhancement in product value.”

That said, the analyst community is bearish on the company’s ability to maintain those high margins over the short term. Investment banks estimate that Tuya’s gross margin will fall to 46.9% in the first and second quarters of this year, before rising to 47.3% in the second half of the year, according to Bloomberg.

Analysts also expect Tuya’s revenue growth to slow, forecasting a 14% increase this year, as the company continues to lose money. The company lost $60.3 million last year, and that figure is expected to narrow to $33.97 million this year and drop further still to $26.93 million in 2025. 

Overvalued stock? 

Despite its stock gains last year, Tuya shares still trade about 20% below the HK$19.30 price for the company’s Hong Kong listing in 2022, which complemented its listing in New York a year earlier. Despite that, the stock is still relatively pricey in valuation terms. It currently trades at a price-to-sales (P/S) ratio of 4.7 times, which is even higher than 4.5 times for artificial intelligence (AI) specialist SenseTime (0020.HK) and 3.8 times for SaaS company Kingdee (0268.HK).   

Investors might also want to take note of two other factors involving this company. One is Tencent’s 10% stake, which could pressure Tuya’s shares if Tencent decides to sell down the holding, following its other recent divestitures for similar-sized stakes in JD.com (9618.HK) and Meituan (3690.HK). The other issue is China-U.S. tensions, which have previously put Tuya’s stock at risk of being de-listed from New York, and also led to accusations by several U.S. lawmakers that Tuya could pose a national security risk due to its China roots. 

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