What happened
Shares of Agora (API +0.85%) plunged today, down just over 20% as of 11:22 a.m. ET. The Chinese enterprise software platform reported earnings last night, which came in below consensus, along with softer-than-expected guidance.
Sentiment also wasn't helped by the broader Chinese economy, as the government began to reinstitute harsh COVID-19 measures in the country this week due to rising cases. In response, virtually all Chinese stocks are generally down after getting a bear market bounce over the past few weeks.
NASDAQ: API
Key Data Points
So what
For those unfamiliar, Agora sells its software-based platform-as-a-service to other companies looking to embed video and voice into their applications without having to build the back-end infrastructure themselves. The company does this through its application programming interfaces, or APIs, as its ticker would indicate.
While that's a growth industry, in the third quarter, Agora saw revenue fall 8.9% over the prior year, and its net losses per ADS were -$0.25. Both figures missed expectations.
The report showed just how strong the headwinds are right now for the Chinese economy. While dollar-based net retention rate (DBNRR) for U.S. and international customers was 130%, it was only 70% for Chinese customers. That means the average Chinese customer used the platform 30% less than the prior year. Overall DBNRR was just 84%. In addition, gross profit plunged 17% as revenue skewed toward Agora's lower-margin broadcast product.
CEO Zhao Bin acknowledged the tough macroeconomic headwinds but also remained upbeat in his letter to shareholders, saying:
Despite these macro challenges, we continue to see strong demand for our products from new use cases such as live video shopping, which didn't really exist in the U.S. market 18 months ago. As we have seen again and again in our history, real-time engagement technology can transform any online activity and make it more immersive and engaging. This is why we remain optimistic about the long-term potential of our technology and products.
Now what
Agora certainly has a favorable tailwind due to the growth of live video and more immersive digital applications; however, the Chinese economy is a mess right now, with the government's unpredictable COVID policy, "common prosperity" regulations on tech companies, and its tenuous relationship with the U.S.
Agora could be an interesting stock after this decline, as it still has $483.4 million in cash and no debt, while its market cap is just south of $1.2 billion. While the company is burning cash, its operating cash burn was only $8.8 million last quarter, so it seems manageable.
Of course, there are a lot of Chinese tech stocks that look dirt cheap right now. Yet that is at least partially well deserved, given the tremendous uncertainty in its economy and the government's position geopolitically.
For those willing to dive into this foreign market, make sure you are careful, with high conviction in the Chinese company in question, along with an informed view on the government's future course of action.
