TUYA - It's Premature To Rate Tuya As A Buy

2023-09-15 10:58:17 ET

Summary

• Tuya Inc. shares didn't perform well, even though its Q2 2023 results beat expectations.
• Tuya's near-term prospects are unfavorable, taking into account China's recent monthly export numbers and the RMB-USD exchange rate fluctuations.
• I still rate Tuya Inc. as a Hold, as I think that it is too early to be bullish on the company's shares now.

Elevator Pitch

I still rate Tuya Inc. ( TUYA ) [2391:HK] stock as a Hold. It is way too early to upgrade TUYA's rating to a Buy.

Tuya's Q2 2023 financial performance was pretty decent, but the market is still unconvinced that TUYA's results will improve substantially in 2H 2023. TUYA's shares have underperformed on both an absolute and a relative basis in recent times, as investors consider negative metrics relating to China's export data and the RMB-USD exchange rate.

I will only consider revising my rating for Tuya to a Buy in future if there are indicators pointing to top line growth acceleration for the company. As it stands now, I am of the view that a Hold rating for TUYA is fair.

Above-Expectations Q2 2023 Results Didn't Boost TUYA's Share Price Performance

I wrote about Tuya's share repurchase program and the company's business recovery timeline with my prior July 6, 2023 update .

Following the publication of my earlier article, TUYA's shares pulled back by -10.4% (source: Seeking Alpha price data) as the S&P 500 (SP500) rose by +2.1% during the same time period.

TUYA's most recent quarterly set of results was pretty decent, but this wasn't sufficient to provide support for the company's shares, as highlighted above.

The YoY revenue contraction for Tuya narrowed from -26.1% in Q2 2022 and -14.2% in Q1 2023 to -8.9% for the second quarter of the current year. Q2 2023 also marked the third straight quarter running that TUYA managed to register positive QoQ top line expansion. Separately, TUYA recorded an operating loss of -$31.4 million in the second quarter of 2023. This represented an improvement from the company's operating losses of -$39.5 million and -$32.3 million for Q2 2022 and Q1 2023, respectively.

Tuya's actual Q2 2023 top line and EBIT were better than the sell-side analysts' consensus financial forecasts by +9% and +7% (source: S&P Capital IQ ), respectively.

Tuya shared at its Q2 2023 results briefing that "the total sellout of IoT (Internet of Things) products for all our brand customers" achieved "a modest year-over-year growth" in 1H 2023, in tandem with "an ongoing improvement in inflation in Europe and the U.S." This explains why TUYA's financial performance improved in the recent quarter and exceeded the market's expectations.

But TUYA's reasonably good second quarter results weren't sufficient to convince investors that the company's financial outlook will improve significantly in the second half of this year, as detailed in the subsequent section.

Tuya's Top Line Growth Prospects Remain Unexciting

Tuya's near-term revenue growth prospects are still lackluster, and this might provide an explanation for the company's weak stock price performance in the past two months as mentioned earlier in this article.

Three of the four sell-side analysts covering TUYA's shares raised their fiscal 2023 top line forecasts for the company in the last one month after the company reported better than expected Q2 2023 results. But the current market consensus estimates only point to TUYA's revenue expanding modestly by +5.5% to $219.7 million for this year. As a comparison, Tuya's top line growth rates were much stronger at +70.0% and +67.9% for FY 2020 and FY 2021, respectively.

A specific economic metric might have prevented the sell-side analysts from becoming too optimistic about TUYA's top line prospects. Seeking Alpha News published an article last week on September 7, 2023 highlighting that "exports from China dropped 8.8% y/y to $284.87 billion" for the prior month, which represented the "fourth straight month of decline."

Also, Tuya's top line performance in the second half of the current year could potentially be negatively impacted by unfavorable foreign exchange fluctuations. At its second quarter results call, TUYA noted that "we anticipate facing ongoing challenges related to currency exchange" for Q3 2023. The company's financial results are presented in USD, but it earns most of its revenue in RMB. According to an August 29, 2023, Financial Times news report cited projections from Goldman Sachs ( GS ) and Société Générale indicating that the RMB is expected to further weaken against the USD in the coming months and towards the end of 2023.

Valuation De-Rating And Consensus Price Target Cut

In recent times, TUYA's shares have been hurt by a de-rating of its valuations, as sell-side analysts reduced their target prices for the stock.

Tuya's consensus forward next twelve months' price-to-revenue multiple compressed from 4.84 times as of July 3, 2023 (the last trading day before my earlier article was written) to 3.65 times at the end of the September 14 trading day as per S&P Capital IQ data. In the past year, TUYA's trough and peak price-to-sales valuation multiples were 1.85 times and 8.21 times, respectively.

The sell-side's consensus price target for TUYA was lowered by -15% after the company revealed its Q2 2023 financial performance in late August. As indicated in the preceding section of this article, most of the analysts (3 out of 4) revised their top line estimates for the company upwards recently, but TUYA's consensus target price still decline. As such, it is reasonable to infer that the sell-side analysts have made the decision to assign a lower valuation multiple to Tuya, when they updated their price targets for the stock.

Tuya is unlikely to witness a positive re-rating of its valuation, until there are favorable signs emerging, such as an improvement in China's export numbers and a stabilization of the RMB.

Concluding Thoughts

It is premature to label Tuya Inc. shares as a Buy now, notwithstanding the company's above-expectations second quarter results. A review of changes to Tuya's consensus revenue forecasts and price targets indicates that investors expect the company to take a longer time to reignite its revenue growth. Therefore, I have left my existing Hold rating for Tuya unchanged.

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