TUYA - Tuya: A Speculative Bet As Growth Ramps And Margins Expand

2023-11-29 16:37:25 ET

Summary

• Tuya Inc. is a $2 stock of a company operating in the competitive Internet of Things market, making it a speculative buy with risk.
• The company reported strong top line growth, with total revenue increasing by 35.7% to $61.1 million.
• While there was a decline in SaaS and other revenue, the Internet of Things PaaS revenue saw a significant jump of 48.1%.
• Outstanding margin expansion and an improved operating outlook.
• We see a strong upside if Tuya Inc. can execute.

Tuya Inc. ( TUYA ) is a $2 stock that was asked about today in our speculation and high-reward risk trading chat room. We had not covered this stock previously, so we took a look at performance and the company's outlook and determined that TUYA is worthy of a speculative buy for continued upside, but comes with risk.

For those unfamiliar, Tuya Inc. is a Chinese stock, which in and of itself carries risk. Moreover, they operate in a competitive space, providing a platform-as-a-service for Internet of Things ("IoT") companies in China and overseas. Revenues are generated from the company's Internet of Things Platform as a Service (or PaaS for short), as well as Industry Vertical Software Solutions, and Cloud Services, under its software as a service, or SaaS (Software as a Service) offerings.

Adding to the speculative nature of the company, outside its geographic location, is that it competes with the largest companies in the world, making gaining market share challenging. The growth of the company, while respectable, is about in line given all things valuation-related , but if the company can execute and continue its impressive margin expansion and push into profitability, shares can continue this recent grind higher.

We rate Tuya Inc. stock a speculative buy. The company also just reported Q3 earnings , which gives us a fresh look at the company and its outlook. Let us discuss.

Top line growth strong

As we look at the just-reported earnings , we note respectable sales growth. Total revenue jumped to $61.1 million, rising from $45.0 million, or 35.7% a year ago. However, when we look at the operating segments, we see some mixed performance, adding to the speculative nature of this trade. There was a decrease in SaaS and other revenue, but nice growth in the PaaS revenues.

Segment performance details

Let's look first at the decline in SaaS and other revenue. This segment saw a 5.0% decline in revenue to $8.5 from a year ago. Management attributed this largely to foreign exchange issues, but there were also organic declines in certain offerings. However, there was an increase in Cloud and software products, including SaaS solutions and the company's "Cube solution" offering. Overall, the segment was mixed. But the Internet of Things PaaS revenue jumped a whopping 48.1% to $45.8 million versus $30.9 million a year ago.

We expect further growth here as demand continues to pick up following a tougher operating environment over the last year. This jump comes as management noted customers were still "cautious," and it is promising to see growth under such a view. Finally, it is worth noting that the company's smart device distribution revenue also surged 32.1% to $6.8 million from $5.2 million a year ago.

Margin power

Now, we would like to see even stronger margin expansion here frankly, but the margin expansion is still positive. The pace of revenue growth did outpace the cost of revenue growth. While revenue was up 35.7%, we saw the cost of sales rise 28.4% to $32.6 million from $25.4 million a year ago. This led to gross profit rising 45.2% to $28.5 million from $19.6 million. We saw a nice gross margin expansion of 310 basis points to 46.7%.

Working lower into the earnings statement, despite the higher revenue, we also saw a massive decline in operating expenses. They dropped 21.7% to $47.0 from $60.1 million a year ago as reported. Backing out share-based compensation expenses and long-term investment impairment, adjusted operating expenses were down 26.2% to $32.0 million. This is largely promising, though we do note that research and development costs were $24.9 million, down 22.9%. Largely this was due to streamlining of operations, and not necessarily from massive reduction in research, though research and development is a key growth driver, so interpretation of these declines is clouded. Marketing and selling expenses were down 33% as part of a cost savings plan, which we view as bullish.

Now here is the deal: Tuya Inc. is significantly cutting losses, but it is still losing money, and this adds to the heavily speculative nature of the company. Operating loss was $18.5 million, but this was down a strong 54% from $40.4 million in losses a year ago. Adjusted loss from operations was just $3.5 million versus $23.7 million a year ago. When we consider the company's past two quarters, we are about at breakeven, and even seeing positive adjusted EPS, continuing to move in the right direction. That said, thanks to some interest income, we saw a net profit of $10.1 million versus a net loss of $15.9 a year ago, or earnings of $0.02 per ADS, versus a loss of $0.03 last year.

Forward view

As we look ahead, we view Tuya Inc. as a speculative buy, but with reward potential, if the company can execute. The operating environment seems to be improving, and the cash position is sufficient for the medium term at $961.0 million. Inflation is subsiding and the supply chain situation is improving. Moreover, the company sees its "cautious" customers starting to increase spending in 2024. Given the company's efforts to reduce expenses, and widen margins, if revenues can continue to ramp, we have a growth story emerging, but the execution risk is high for Tuya Inc.

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