Despite facing pressure in financials and an unfavorable external environment, Tuya is still a stock that should be on your watch list.

Tuya (TUYA), a well-known IoT cloud development platform that we've covered before, announced its 2021 financial results for the fourth quarter and fiscal year 2021 in March. According to the report, the company’s total revenue reached $302.1 million, up 67.9% year-over-year. Its two core revenue segments, IoT PaaS and SaaS, all experienced high growth in 2021.

However, it seems to be facing problems under the turbulent macroeconomic environment. In April, we interviewed the company again to learn more about updates that investors care about, and this article will give an insight into what's happening and further analyze if Tuya is a stock of potential.

A Growing Tuya

As we mentioned in the last analysis when Tuya was proceeding with its IPO, Tuya is founded in 2014 and has become a popular global IoT PaaS & SaaS development service provider, lying in the smart home sub-industrial chain and providing global developers, companies, and individuals with one-stop IoT services.

The company's two founders both have technical backgrounds and once worked for Alibaba Group (BABA), which is a key factor for success in the Chinese market. The company's target customers include brands, OEMs, developers, and retail chains across a broad range of smart devices and industries.

According to the updated release, Tuya’s total number of customers increased from 5,000 in 2020 to 8,400 in 2021. In particular, IoT PaaS premium customers contributed more than $100,000 within one year, increasing from 188 in 2020 to 311 in 2021, 50 of which are from the Fortune 500 list. According to the company, its annual retention rate of premium customers remained at a level of over 90%, indicating robust growth.

The Financials Dilemma

As previously mentioned, for the fiscal year of 2021, Tuya achieved a total revenue of $302.1 million, up 67.9% year-over-year. Its IoT PaaS revenue reached 261.4 million, up 72.3% year-over-year. Tuya’s IoT PaaS revenue for Q4 grew by 13.9% year-over-year to $62.1 million. Notably, during the quarter, premium customers contributed 87.3% of Tuya’s IoT PaaS revenue, indicating a solid customer relationship.

For the other core business, SaaS and other revenue contributed $18.6 million, surging 203% year-over-year. Notably, the IoT PaaS business of Tuya mainly relies on the international markets (Tuya estimated IoT PaaS business in China is still in its early stage and has potential for growth), as more than 90% of its SaaS revenue was from China.

We think the data indicates an ability and a willingness to extend Tuya’s platform usage over time, and to grow revenue from existing customers. Among all the products, home safety and sensor products, home appliances products, and entertainment energy-saving products grew at a significantly faster pace than electrical and lighting products, which contributed to about half of IoT PaaS revenue.

At the end of 2021, Tuya’s smart hotel and apartments SaaS cumulatively supported the IoT upgrade of more than 40,000 hotel rooms in China, with a customer repurchase rate exceeding 85%.

Tuya’s smart commercial lighting SaaS supported nearly 300 commercial lighting projects in 12 countries and regions, including China, Singapore, Germany, the Netherlands, the United Kingdom, and Canada, making us believe there is some steady growth of Tuya in the international market. These all show that the firm is consistently reshaping its business model and fulfilling its potential.

However, Tuya is facing huge cost pressures. Its cost of revenue in 2021 increased by 47.7 % to $174.2 million from $117.9 million in 2020, while its operating expenses in 2021 increased by 136.3% to $311.4 million from $131.8 million in 2020.

Though its overall gross margin increased to 42.3% in 2021, up 7.9% compared with 2020, its operating margin was down to -60.8 % in the fiscal year 2021, moving 22% compared with the same period in 2020. Its net loss increased to $175.4 million in 2021, compared to $66.9 million in 2020.

However, we find that the research-related cost remains the largest ingredient of its total cost (over 55%), which shows it has further potential in the future. 

Three Solid Core Competencies

To get more insights into the company, we talked to the company’s management team and discussed its three core competencies, which may help the company control its cost growth.

Firstly, the company has built a rich ecosystem powered by its intelligent devices. The Tuya IoT development platform has accumulated over 510,000 registered IoT device and software developers, up 94.7% from about 262,000 developers in December 2020. Developers are from more than 200 countries and regions, covering more than 120,000 stores around the world.

At the same time, Tuya has integrated the resources of industry service providers, integrators, and operators, gradually laid out the whole industrial chain, and helped brand customers sell smart devices to the world. According to Eva Na, VP & CMO of Tuya whom we interviewed, Tuya helps consumers control devices of different brands and categories with one app and enjoy the convenient life of interconnection of all things.

Additioanlly, firms in property, real estate, rental, hotel, and other industries can create their own smart solutions through the Tuya IoT development platform, including SaaS and PaaS level solutions.

These, we think, may become a key to competing with the giant players in the sector, including Alibaba Cloud and Huawei Cloud, because their business model is different from Tuya's innovative business model. As well, due to the conflict in international relations, these companies did not develop in overseas markets as smoothly as Tuya.

Second, Tuya affirmed its support for Matter and became a member of OLA in 2021. Matter is a unified smart home standard to allow interoperability between devices and smart home platforms, led by Amazon, Apple, Google, Comcast, and the Connectivity Standards Alliance (CSA). We think the platform enables Tuya’s customers and business partners to seamlessly join in the new smart home connectivity standard.

Tuya is planning to launch new series of solutions that will also support the Matter standard, possibly in 2022 when the new communication protocol finally launches. We believe it will earn connections between more devices and increase compatibility, especially for international customers. Moreover, Tuya was also invited to be a member of the Open Link Association (OLA), which, we think, will ensure its client base from China.

Third, Tuya has maintained positive cooperative relations with the three major operators in China. The company may utilize the large client base that the three operators provide. For the three operators, Tuya can provide valuable privatized IoT deployment.

The company introduced the Tuya Cube at CES 2022, a cloud-agnostic IoT service deployment solution that helps customers overcome challenges posed by the rapidly expanding IoT industry, which we think will further strengthen the cooperation with the three operators.

Core Predicament

Though we think Tuya has these three core competencies, the company has still been facing a problem, which is cost, as we keep mentioning.

One main reason behind this is that its IoT products have a higher price than its traditional products, especially in the high inflation economic environment. Inflation, in the past 12 months, has been running above 5%, showing a sudden jump which has not been seen in more than 20 years. High inflation could create significant sales pressure downstream, which may be transferred to upstream companies such as Tuya.

However, notably, through our research and questions for the company, we noticed that Tuya's pricing strategy is always focused on mutual benefit along the value chain, which we think also could be the reason why Tuya's costs have been high and increasing.

Based on this, we think, with the stabilization of its supply chain costs, there's a chance that Tuya’s cost pattern will be optimized somehow by increasing its overall gross margins.

The expansion of its gross margin will mainly come from three ways in the near future: research optimized control of the cost; increasing economic scales; more revenue generated from segments with higher margins such as home appliances, home safety and sensors, entertainment, and energy-saving.

Valuation

To value Tuya, we think that finding a comparable set of companies is of most importance. We chose 6 public companies with similar businesses (Smart home solutions) and also picked the whole software application industry ratio statistical data for comparison.

Based on the statistics, we found that Tuya's ratio (1.9 x) is much lower than its competitors' weighted average (5.1x, 50% weighting of 6 smart home solution companies and 50% weighting of software application industry average), indicating it is undervalued compared with its peers.

However, considering international conflicts and inflation adjustments, we think it is at a great price but with high risk. We believe Tuya is a company with great potential in the sector from our valuation analysis.

Looking Forward

As Tuya mentioned in its earnings call, the entire global IoT market, including hardware, software and services, is expected to grow from $659.2 billion in 2019 to $1,126 billion in 2024, with a compound annual growth rate of 11.0%.

We got satisfying correspondence from Eva Na that Tuya will remain cautious toward challenging global economies. The company will further prioritize development wherein IoT products are less expensive than traditional products to further cut costs.