Agora Looks for New Excitement With Online Workplace Audio, Karaoke Metaverse

Company that shot to fame as Clubhouse technology partner has taken a beating since then on China education crackdown and questions on about its security

Key takeaways:

• Agora reported its revenue grew just 21.5% in the fourth quarter, and forecast the figure would rise just 5% in 2022 due to effects from China crackdown on private educators
• Company’s shares hit all-time low last week, but have rallied 20% since then, including an 11% rise after release of its latest results that spotlighted new growth initiatives

By Doug Young

What a difference a year makes.

It’s hard to find a phrase that more-aptly describes the situation for Agora Inc. (API.US), the internet audio pioneer that released its latest quarterly results this week. Those results show a company that has gone from investor darling to one that is now trying its best to avoid becoming yesterday’s news.

The latest results, plus revenue guidance for 2022 that looks quite anemic, really do seem to portray a company that doesn’t look too exciting. But Agora and its chief Zhao Bin, an internet audio and video pioneer who also goes by Tony Zhao, were doing their best to plant seeds in investors’ minds showing they shouldn’t write off the company just yet.

Some of those seeds do indeed look intriguing, including the company’s play on the highly-hyped concept of metaverse, which we’ll look at shortly. But first we’ll give a quick history lesson to show why this company was once so hot, and then a look at its latest financials.

Agora was a relatively low-key company that suddenly shot to fame almost exactly a year ago when it was revealed that it provided the audio technology behind sudden internet sensation Clubhouse. Its stock soared after that, peaking in February last year at more than $100 – more than five times the $20 price from its IPO less than a year earlier.

But then the problems began, including a report at the time showing that Clubhouse web traffic was being directed through Agora’s servers in China, even though the pair never actually confirmed their relationship. Techies also quickly uncovered gaping holes in the company’s encryption. All that prompted Agora to say it doesn’t store any user data and leaves encryption to its customers.

On top of all that, the company has also been hammered by a massive crackdown on China’s private after-school tutoring sector, which was previously one of its biggest customers.

As the company’s foundations crumbled, the stock followed suit by falling steadily to reach an all-time low of about $8.70 just last week. Things have improved slightly since then, and a mini rally over the last two trading days since the latest results announcement has the stock now trading about 21% higher from last week’s all-time low.

Some might argue this is a classic “dead cat bounce,” and you do admittedly need to dig a bit into the company’s latest report to find real signs for optimism. But those signals are definitely there for anyone who cares to look.

The company’s big-picture numbers look decidedly unimpressive, with revenue up just 21.5% to $40.4 million – far slower than what you’d expect from a company that previously notched triple-digit growth. Its net loss for the quarter also tripled to $21.2 million from $6.2 million a year earlier on sharply rising R&D and marketing costs.

But in the most worrisome signal, the company forecast revenue would grow by an anemic 5% this year to between $176 million and $178 million – something investors in an electric utility or mining company might like, but the opposite of what you’d expect from a high-growth internet company.

Education: a double-edged sword

The company was quick to explain that China’s education crackdown was one of the main culprits behind the so-so fourth quarter results and the even weaker outlook for 2022. That crackdown saw China ban most after-school tutoring services by private companies, effectively wiping out an entire industry that was previously worth billions of dollars.

That industry had been one of Agora’s biggest customers, accounting for about a quarter of its total revenue, CFO Wang Jingbo said on the company’s earnings call, adding Agora expects that revenue source to disappear completely this year.

But he and Zhao, a founding engineer at Webex, which was later acquired by Cisco, pointed out that education has big possibilities outside China as the pandemic has shown the big potential for more classroom activity to move online. Another area where the company saw big potential was in providing its technology for work-oriented situations.

“Most recently, we…helped one of the largest companies in the world by market cap to launch an audio live cast platform for the workplace, reflecting that the trend of a lot of the real-time engagement features previously only available in social apps, are now coming to professional apps,” Zhao said.

But perhaps most intriguing was the company’s dalliance with the metaverse in the form of its MetaKTV product that “reproduces an old-school karaoke room in the virtual world,” Zhao said on the call. We encourage anyone who wants to know more about this product to check out the transcript of the call, which contains a bit of colorful detail. But suffice to say it does look quite intriguing as a potential new money spinner. 

From a financial perspective, the most-positive signals in the latest report actually come from Agora’s increased spending, which seems to show it is working hard to develop new products and services and attract necessary talent to get it back on a better growth track. Its R&D costs for the quarter doubled to $28.8 million, partly due to offering more stock to employees as incentives; and its sales and marketing costs also grew by a similar 85.5% to $13.8 million.

We should also mention that Agora unveiled a $200 million share buyback program, meaning it could spend a sizable chunk of the $755 million in cash it had at the end of last year buying up its lowly valued stock.

The shares really do look quite depressed at current levels, especially if you think the company could be sewing the seeds for a brighter future as it expands beyond its China base that now accounts for about two-thirds of its revenue. On a price-to-book (P/B) ratio it trades at a lowly 1.2, compared with a 2.6 for the similar Twilio (TWLO.US) and a much higher 13 for voice-over-internet pioneer 8×8 (EGHT.US).

Analysts also see considerable upside for the stock, with seven polled by Yahoo Finance giving an average target price of $28.97, or more than double its latest close of $11.34.

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