RAAS - Cloopen Is The Weirdest Buy Ever

2023-04-30 03:39:17 ET

Summary

• Cloopen is unprofitable and in a horrible business.
• Cloopen was exposed to fraud.
• Cloopen hasn't filed financials for 1.5 years.
• Cloopen is a buy.

Red flags! Red flags everywhere!

Today, I’m going to write the weirdest bullish article ever. This article will be on Cloopen ( RAAS ).

Cloopen is a Chinese company acting on the CPaaS (Communications Platform as a Service) market, as well as the Virtual call center market. CPaaS is basically about providing other companies access to legacy (SMS, voice) and app communications through an API (Application Programming Interface). This is the same business Twilio ( TWLO ) engages in.

There are many things which make Cloopen an interesting company, and not in a good way. Let me enumerate them.

Cloopen Is Not Profitable And The Business Is Horrible

The CPaaS business is highly competitive, which typically means it’s a lousy business to be in. This is why I’ve been bearish on Twilio for a long time, and the same applies to Cloopen.

It’s a commoditized business in a way, since anyone can provide a similar API to connect to the same telecom operators. Hence, in the end most competitors are just playing arbitrage with the prices the telecom operators provide them with.

However, these companies (Cloopen and Twilio included) do try to go higher up in the value chain, where higher margins are potentially more sustainable. Such is also the case with Cloopen, both through its virtual call center efforts, and its expansion towards CRM (Customer Relationship Management).

There Was Literal Fraud At Cloopen!

This all by itself would immediately make me avoid a stock. Fraud is fraud. It’s scary and puts everything into question, including the existence of the actual business as well as the numbers it reports.

In Cloopen’s case, mere months after it IPO’d in the US, it had to recognize that its revenues for Q2 2021 and Q3 2021 were artificially inflated. Initially, the Q2 2021 revenues were stated to be overstated 5-10% and the Q3 2021 revenues were stated to be overstated 15-20%. Upon the completion of an internal investigation , these overstatements were reduced to 4-6%.

Third, Cloopen Hasn’t Reported Financials Since Q3 2021

Not only is Cloopen’s business not very interesting, not only was Cloopen exposed to fraud, but on top Cloopen stopped reporting financials with its Q3 2021 earnings report.

Hence, there hasn’t been any financial reporting from Cloopen for 1.5 years. This certainly makes it even harder to like the stock.

Also, since Cloopen stopped reporting 1.5 years ago, it’s now exposed to the risk of being delisted. If Cloopen doesn’t put out its 2021 yearly report by May 17, 2023, it’s likely that it will be delisted into the pink sheets for a while. Such is the late filing SEC extension limit granted to it.

Given All Of This, How Can Someone Possibly Be Bullish On Cloopen?

Well, amazing as it is, there might be a bullish case to be made. The case is as follows:

• First, Cloopen exists. This is no short achievement, given the lack of financial reporting and also the fraud it was exposed to, when we consider past small cap Chinese frauds. Cloopen has continued to create new products and participate in trade conferences . It has continued to seek certifications . It has taken measures to improve costs, by appointing Oracle cloud as its international cloud provider. It has also named new accounting firms (twice, unfortunately). It has taken measures to keep its stock listed (by changing the ADR ratio from 2:1 to 6:1). Of note, many of Cloopen’s indications “that it’s still alive” (namely those relating to continuing operation) exist only in Chinese. That is, the company is making no PR effort to promote the stock in English.
• Second, Cloopen had more than $400 million in cash on its balance sheet when the whole trouble started, with most of the cash coming from it then-recent IPO. And the independent investigation into its finances didn’t find anything wrong with the cash (which ought to have been the easiest thing to find). Moreover, considering Cloopen’s estimated cash burn, at least $300 million in net cash should still exist today. This is already a clue into why we can be bullish on Cloopen – its present market capitalization is a mere $62 million (at $1.20). Hence, it trades for an estimated 21% of cash on hand. It’s easy to see that any positive development on Cloopen will see the stock be up 100%+

• Third, since Cloopen exists, changes accountants and tries to keep its stock listed, clearly Cloopen is trying to file financials again. In my opinion, filing financials isn’t an incredibly tall order. It’s bound to happen.
• Fourth, although I don't like the CPaaS sector, Wall Street likes it. This, given the extreme cash position, will in my opinion assure demand for the shares as soon as Cloopen restarts filing financials.

So, on the day that Cloopen actually files financials, what will we have?

We will have a decent, but loss-making, CPaaS and virtual CC operator, trading for 21% cash and 0.5x sales or less. On the same sector where Twilio goes for 2.8x sales.

I expect Cloopen to file financials, maybe as early as next month, but likely within 6 months. It can happen that it will be delisted from the main board before that happens, though. But I doubt a company would go to such trouble as changing its ADR ratio, when just a few months later it would be delisted anyway, if it didn’t file its 2021 report. Hence, I can only surmise that there’s a strong effort being undertaken to resume filing financials.

In my opinion, it’s not hard to see that all Cloopen needs to do is to file financials, and the stock will be up strongly in spite of its dirty past (given the extreme cash position and negative EV it entails). And that is the bullish thesis here.

Notice that, if Cloopen does file financials and goes up 100%+ as a result (as is my opinion that it might do), it will still be trading for under half of its net cash on hand. At that point, even after such reaction, the company will still be trading at an incredibly depressed valuation.

Of course, as I started this article, nearly everything about Cloopen looks bad. And there's the risk things could be worse still, if for instance the cash was all gone (fraudulently). In that case, this weird bullish thesis would fail. But one should remember that in the context of the external forensic investigation into the fraud which happened at Cloopen, nothing was found about the cash disappearing.

In short, the bullish thesis on Cloopen is that after it files financials and thus returns to normalcy, it will just be a normal CPaaS / virtual CC / CRM company growing somewhat, printing losses, but trading at an unbelievable 1/5 of its cash on hand (leading to massively negative Enterprise Value). Such companies don't exist in the market, and even Japanese stocks (not traded in the US markets) trading at negative Enterprise Values, trade much closer to zero Enterprise Values and act in a lot "less sexy" businesses (for good or worse, the market typically appreciates tech stories over everything else).

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