To The Moon

Key points:

1、Tuya’s shares have rallied 25% in the nine trading days since it announced a share buyback, but are still well below their levels prior to a recent unexplained selloff

2、Company posted triple-digit revenue growth in the second quarter, banking on its leading position as operator of a platform for internet of things (IoT) developers

By Doug Young

There’s nothing like a good share buyback to rescue your stock in times of unexplained turbulence.

That appears to be the message, at least in the short-term, from a $200 million share buyback program announced Aug. 30 by Tuya Inc., which is one of the world’s biggest platform as a service (PaaS) company for internet of things (IoT) developers and product makers. After announcing the buyback, the stock reversed its previous skid to bounce back by 25% from an all-time low over the next nine trading days.

Talk about getting some bang for your buck, or in this case, your $200 million.

The company also got a boost from outside around the same time after global index compiler FTSE said on Aug. 26 it would add Tuya to its Global Equity Index Series for China as part of a semi-annual review. Such inclusion is highly sought by all companies as it marks a vote of confidence by the index compiler in the company’s status among its industry peers.

From a more practical perspective, such inclusion also often provides a lift for newly added stocks since funds that track those indexes must buy shares of those firms after each adjustment.

But the bigger story, at least in our view, is what exactly sparked a massive selloff that caused the stock to lose more than half its value between Aug. 10 and Aug. 30, before announcement of the buyback.

The Aug. 10 date looks noteworthy for the fact that it came about a week before the release of the company’s latest quarterly earnings report – its second since its IPO in March. And frankly speaking, the report itself looks solid enough, though growth in expenses outpaced revenue growth. But that kind of imbalance is quite common for this kind of young company, especially one in a hot and fast-growing area like IoT.

For the less tech-savvy out there, IoT refers to a future generation of high-tech gadgets, appliances and other electrical devices that can communicate with each other and their owners and other humans to make better-informed operational decisions. Most major electronics brands are working with this kind of web-based technology, putting a company like Tuya in a strong position to capitalize on the sector’s growth.

Reflecting that this isn’t just a made-in-China story, Tuya pointed out on its Aug. 18 earnings call that its revenue is now roughly evenly split between about 30% for North America, a third for Europe and the rest coming from the rest of the world. We’ll look at some more of the company’s latest financials shortly, but will spoil the surprise by saying they don’t seem to show anything major amiss.

That brings us back to what sparked the massive sell off between Aug. 10 and Aug. 30.

The company listed its shares back in March, well before Beijing began expressing data security concerns over Chinese firms listing in the U.S. in July around the time of the IPO by the Uber-like DiDi Global. After its debut, Tuya’s American depositary shares (ADSs) spent most of their life in the $20-$26 range, which is roughly around and even above the $21 IPO price.

But then August arrived, and the shares suddenly began to fall to as low as $9.51 before staging their modest comeback following the Aug. 30 share buyback announcement. In a somewhat unusual pattern, trading in the stock had become very quiet from the last week of July, only to suddenly surge starting Aug. 16 – six days after the freefall began, but still two days before the company announced its latest results.

That would seem to indicate something may have happened behind the scenes around the time the shares began falling, perhaps something like a ratings downgrade by a major brokerage, and that news of that move finally made it into the market and set off the pickup in trading volume.

Regulation to Blame?

Regardless of the actual catalyst, regulation seems like the most-likely culprit behind the investor skittishness. That skittishness has come in response to comments from China’s cybersecurity regulator, which has been flexing its muscles since DiDi’s IPO by saying all tech companies must undergo a data security review before making overseas listings.

Tuya’s position working with thousands of IoT product developers certainly puts it in possession of lots of sensitive user data. But that said, that kind of data is more sensitive because it contains business secrets, and seems relatively unrelated to national security that seems to be China’s biggest concern. What’s more, the big majority of Tuya’s customers are outside China, meaning protection of their data should be of less concern to the cybersecurity regulator in Beijing.

Nonetheless, Tuya was clearly aware of the tense climate, and CEO Wang Xueji, who also goes by Jerry Wang, referred to the company’s “deep commitment to data security and privacy” in the earnings press release. A global chip shortage that has made headlines for hobbling the car industry was also providing some problems for Tuya’s customers, though the company said it was helping them to solve those problems.

That takes us into the company’s latest earnings report, which broadly shows a company growing quite strongly. Tuya’s revenue more than doubled to $84.7 million during the quarter, up 118% year-on-year to be more precise. That marked a slowdown from the 200% revenue growth the company posted in the first quarter, though it’s quite possible that earlier number was boosted by a weak comparison for the first quarter of 2020 when the global pandemic was just getting started.

The company’s net loss also more than doubled to $38.1 million from $14.7 million a year earlier, due in part to a sharp rise in operating expenses. But such figures are really quite small when one considers Tuya has more than $1.2 billion in cash and cash equivalents in its coffers, much of that from the March IPO.

That brings us to valuations, which show that Tuya is valued relatively high in absolute terms, though it’s far cheaper than some of its global peers following the recent selloff. Its stock now trades at a price-to-sales (P/S) ratio of 25, compared to a sky high 104 for cloud computing data warehousing company Snowflake Inc. U.S.-based web infrastructure and security provider Cloudflare trades a bit lower, but is still well above Tuya with a P/S of 75.

We should put that in perspective by saying Weimob, a Chinese e-commerce software as a service (SaaS) provider, trades at a far lower P/S of 13; while Xiaomi, a company that likes to bill itself as an IoT specialist but makes most of its money from hardware sales, trades at a lowly P/S of just 1.9.