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Elevator Pitch
I rate Tuya Inc.’s (NYSE:TUYA) [2391:HK] stock as a Hold.
The company is doing the right things to expand its top line and cut costs in a challenging operating environment. I am of the view that the SaaS (Software-as-a-Service) business can be a key revenue growth driver for TUYA in the medium term, and I also like the way that Tuya has shrunk its headcount and reduced unnecessary marketing costs.
But inventory destocking in the smart device market could possibly take as long as a year, and unprofitable companies like TUYA are no longer favored by investors. Therefore, it isn’t realistic to expect a positive re-rating of Tuya’s valuations anytime soon.
Taking into account both the weak smart device industry outlook (affected by oversupply), and the decent revenue and cost management initiatives undertaken by management, I decided that a Hold rating for TUYA is fair.
Business Profile
TUYA calls itself “a global IoT (Internet of Things) development platform service provider” in its press releases. The company was founded in June 2014, and its American Depositary Shares or ADSs began trading on the New York Stock Exchange starting in March 2021, as highlighted in its FY 2021 20-F filing. Tuya has also had its shares listed on the Hong Kong Stock Exchange with the 2391:HK ticker since July 5, 2022.
The IoT Platform-as-a-Service or PaaS business is the key revenue contributor for Tuya, as this business accounted for 87% and 85% of the company’s FY 2021 and Q3 2022 top line, respectively. TUYA derived the rest of its revenue from its Software-as-a-Service or SaaS and smart device distribution businesses.
Challenging Times
The company didn’t offer specific forward-looking financial guidance, when it released its Q3 2022 financial results earlier. However, Tuya’s management did offer some clues about how the company is expected to perform in the near term with its third quarter earnings call commentary.
At its Q3 2022 results briefing, Tuya acknowledged that it will require another “8 to 12 months for the downstream OEMs, brands, wholesalers and the retailers to altogether work through their excess inventory” based on the company’s analysis. This negative short-term outlook appears to be reflected in the market’s consensus numbers for the company.
Based on consensus figures sourced from S&P Capital IQ, TUYA will continue to experience top line contraction on a YoY basis in the next three quarters (Q4 2022, Q1 2023, and Q2 2023). Revenue for Tuya had dropped by -47% YoY from $85.6 million for the third quarter of 2021 to $45.0 million in the most recent quarter.
Separately, the sell-side analysts expect TUYA to remain in losses on both a GAAP and non-GAAP basis till 2024 (the furthest current consensus financial estimates go) at the very least. Notably, Tuya’s actual Q3 2022 GAAP net loss per share of -$0.06 was also wider than the analysts’ consensus forecast of -$0.05 per share as per S&P Capital IQ data.
In a nutshell, these continue to be challenging times for TUYA.
Changing Revenue Mix And Optimizing Expenses
Tuya’s intermediate term prospects are better, as the company has put in place initiatives to drive top line expansion and narrower losses for the company in the years ahead.
As I mentioned in an earlier section of this article, TUYA’s IoT PaaS business contributed the bulk of its revenue historically. As such, there is the potential for Tuya to diversify its revenue base and find new growth opportunities.
One example is the company’s SaaS business. In the recent third quarter, revenue for Tuya’s SaaS business grew by +60% YoY to $8.9 million, which stands in stark contrast with the -57% YoY top line contraction for its core IoT PaaS business to $30.9 million over the same period. It is noteworthy that the revenue contribution from TUYA’s SaaS segment is just a small fraction of the top line generated by its IoT PaaS business.
Specifically, Tuya has already identified the provision of value-added services and geographical expansion as the key medium-term growth drivers for the company’s SaaS segment. At its Q3 2022 earnings briefing, TUYA highlighted that it is focusing on value-added services in the areas of “cloud storage” and “device capability”, and it also revealed that it is in the process of introducing its SaaS offerings in 12 new foreign markets.
Separately, TUYA is working hard to reduce expenses.
With respect to optimizing staff costs, Tuya’s number of employees has already dropped to around 1,900 as of September 30, 2022, which is ahead of the company’s earlier goal of having a headcount of 2,200 by end-2022. In terms of expectations for 2023 headcount, TUYA stressed at its most recent quarterly investor call that it “will still do our best to maintain a concise team” and make use of every “opportunity to improve the efficiency.”
Another area of cost saving opportunities is selling and marketing expenses. Tuya had emphasized at its Q3 2022 earnings briefing that the company “must evaluate what marketing activities are more effective” considering the “current economic environment.” Notably, TUYA’s selling and marketing costs decreased by -33% YoY from $21.2 million in Q3 2021 to $14.1 million for Q3 2022.
Concluding Thoughts
I assign a Hold rating to TUYA. I appreciate the fact that Tuya’s management is pulling the right revenue and cost levers in difficult times like these. But the excess inventories in the smart device market aren’t going away in the near term, which pushes back the recovery time line for TUYA.
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