TUYA - Tuya Cuts Costs As Revenue Drops But More Reductions Are Needed

2023-04-25 11:10:31 ET

Summary

• Tuya provides cloud-based infrastructure for Internet of Things applications.
• The firm has seen sharply dropping revenue and has made progress in reducing its cost structure.
• Given further industry inventory destocking and macroeconomic demand softness, management needs to continue to reduce costs while stabilizing revenue.
• Until I see those results, I'm on Hold for TUYA.

A Quick Take On Tuya

Tuya ( TUYA ) went public in March 2021, raising approximately $915 million in gross proceeds in an IPO that was priced at $21.00 per share.

The firm provides cloud-based infrastructure in China for Internet of Things services and applications.

Management needs to continue to cut costs in the face of continuing soft demand and the prospect of a macroeconomic slowdown ahead.

I'm Neutral (Hold) for TUYA until we see additional cost-cutting and revenue stabilization.

Tuya Overview

Hangzhou, China-based Tuya was founded to develop a Platform-as-a-Service (PaaS) cloud offering to enable developers to build and host their Internet of Things (IoT) applications.

Management is headed by founder and CEO, Xueji Wang, who was previously a Senior Director at Alibaba and was responsible for launching a number of initiatives at Alipay.

The company's primary offerings include:

• Internet of Things Platform as a Service

• Industry Vertical Software Solutions

• Cloud-based Services

The firm pursues customer relationships with businesses and OEMs, primarily in the consumer IoT industry.

However, management seeks to expand its efforts into the Industrial and Agriculture sectors.

Tuya's Market & Competition

According to a 2023 market research report by Global Industry Analysts, the global market for IoT managed services was valued at an estimated $132 billion in 2022 and is expected to reach $703 billion in value by 2030.

This represents a forecast CAGR of 23.2% from 2023 to 2030.

The main drivers for this expected growth are an increasing adoption of IoT technologies across a wide range of industry verticals, including automotive, manufacturing, and healthcare.

Also, a shift to manufacturing 'Industry 4.0' is placing an emphasis on complementing and augmenting human labor with robotics to reduce accidents and increase efficiencies.

Regional growth rates are estimated in the chart below:

Major competitive or other industry participants include:

• Amazon AWS

• Alibaba Cloud

• IBM

• Microsoft

• Google

• Numerous others

Tuya's Recent Financial Trends

• Total revenue by quarter has dropped substantially in recent quarters:

• However, gross profit margin by quarter has trended higher more recently:

• Selling, G&A expenses as a percentage of total revenue by quarter have trended higher in recent quarters, indicating the company is spending more to obtain its revenue:

• Operating losses remain heavy, although the firm has made some progress toward operating breakeven in recent quarters:

• Earnings per share (Diluted) have remained negative but also are making progress toward operating breakeven:

(All data in the above charts is GAAP)

In the past 12 months, TUYA's stock price has fallen 20.3% vs. that of the iShares Expanded Technology-Software ETF's ( IGV ) drop of 4.12%, and TUYA's stock has shown far greater volatility, as the chart indicates below:

For the balance sheet, the firm ended the quarter with $954.3 million in cash, equivalents and short-term investments and no debt.

Over the trailing twelve months, cash used in operations was negative ($70.7 million).

Valuation And Other Metrics For Tuya

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

TUYA's most recent GAAP Rule of 40 calculation was negative (106.8%) as of Q4 2022's results, so the firm has performed very poorly in this regard, per the table below:

(Source - Seeking Alpha)

Commentary On Tuya

In its last earnings call (Source - Seeking Alpha), covering Q4 2022's results, management highlighted the revenue decline due to inventory destocking as consumers reduced their purchases in 2022.

Total revenue dropped 30% but gross profit margin improved, likely due to changes in mix and improvement in cost controls.

However, SG&A as a percentage of revenue continued to rise as the year progressed while operating losses were reduced but still remained elevated.

Notably, management changed the firm's focus toward larger, higher-quality customers, although this focus may slow sales cycle times somewhat as larger firms can take longer to reach a buying decision.

Looking ahead, management says it is confident in the consumer IoT electronics market in the long term, but that may mean that in the short term, the company is more challenged to produce meaningful growth as consumers pull back due to inflationary pressures and macroeconomic demand softness.

Additionally, the depreciation of the RMB against the US dollar means the firm's revenue has taken a further hit in dollar terms. Investors who expect further RMB depreciation would be wise to factor in an additional headwind for revenue going forward.

Leadership did not provide forward guidance but expects brand inventory destocking to be completed by the second half of 2023.

The company's financial position is strong, with ample cash and liquidity and no debt.

The story for Tuya for the rest of 2023 is a continuation of its recent cost-cutting efforts and trying to get the firm's cost structure in line with medium-term revenue, which will likely be reduced for a significant period ahead.

A potential upside catalyst to the stock could include a pause in U.S. Federal Reserve interest rate hikes, reducing negative pressure on its valuation multiple.

However, going forward, the stock's future trajectory will likely revolve around management's ability to drive cost-cutting initiatives as it contends with continued soft demand.

If there is a macroeconomic slowdown, that will compound the firm's efforts to right-size itself in the quarters ahead.

Until we see evidence of its ability to cut costs further, I'm Neutral (Hold) for Tuya.

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