Cloud Specialist Cloopen Remains Stuck on Earth

Company’s shares rally after latest results announcement shows solid growth, only to sink, then rise again, as stock trades at fraction of IPO price

Key takeaways:

• Cloopen’s revenue grew 48% in the second quarter, and it forecast similar gains in the third quarter, as it chases share in China’s lucrative cloud services market
• Despite strongly rising revenues and more large enterprise customers, the company’s shares are still hovering near all-time lows

By Mia Shanley

It’s the Chinese cloud stock that just refuses to take flight. That’s despite another robust quarter of growth for cloud-based services firm Cloopen Group Holding Ltd. (RAAS.US), which has a strong foothold in the world’s fastest-growing cloud services market.

Cloopen shares initially soared 24% following the Aug. 11 release of its second-quarter results, as it reported healthy revenue growth while still losing money. But the stock quickly pulled back in the following days to trade near all-time lows of around $4 per share, before rallying again to nearly $5. Clearly there’s still a lot of indecision about the company.

No matter how you slice it, the company’s stock still trades well below its $16 listing price from its February IPO on the New York Stock Exchange, which was one of this year’s biggest new listings by a Chinese company at that time.

Cloopen, whose shares traded as high as $48 right after listing, has yet to make a profit. It continued that tradition in the second-quarter, as its net loss widened to 105.6 million yuan ($16.2 million) from 62.2 million yuan the previous year, according to its latest results. Excluding factors like share-based compensation and some one-time items, its non-GAAP net loss actually shrank to 26.4 million yuan from 37 million yuan in the same period of 2020.

The company’s stubbornly weak share price is somewhat baffling when one considers its otherwise healthy growth trends.

Not only did Cloopen report a 47.9% rise in second-quarter revenues to 273.9 million yuan, its gross margin also improved to 43.1% for the quarter from 38.5% a year earlier. It forecast its revenue would grow between 43.8% and 45.3% in the third quarter, representing a slight slowdown from the previous quarter but still a healthy gain.

On the company’s earnings call, CFO Li Yipeng, who also goes by Steven, boasted of the firm’s growing roster of larger enterprise customers from areas such as the banking, insurance and automotive sectors. The company had 205 large enterprise customers at the end of the second quarter, up from 193 in the previous quarter.

The focus on more lucrative, large clients is a notable development for the company whose roughly 13,000 active customers have tended to be among small and medium enterprises. As it attracts such bigger names, it would be helpful for Cloopen to provide greater insight into these “large customers” that are likely to be the driving force behind its growth in the months and years ahead.

U.S. cloud communications giant Twilio, with its own roster of 240,000 client companies, counts heavyweights like Morgan Stanley, Uber and Netflix among its biggest customers. Apart from their big names, such customers tend to provide steadier and bigger business than smaller firms.

In a sign of its growing clout, Cloopen said it had partnered with Chinese tech behemoth Tencent to offer its products on Tencent Cloud’s joint development platform, and has started receiving orders for products for the manufacturing and energy sectors.

All this bodes well for the Beijing-based company whose full suite of cloud-based products and services include predominantly communications platform as a service (CPaaS) and cloud-based contact centers (cloud-based CC), the latter of which saw revenues more than double in the second quarter from a year ago.

Punished for Being Chinese

Cloopen’s stock woes date back to late March when its shares first fell below their IPO price. While that was well before U.S.-listed Chinese shares came under fire for a number of reasons, the controversy that has shaken the entire Chinese tech universe – much of that related to data security – hasn’t exactly helped Cloopen.  

The company’s weak share price has no doubt frustrated big-name investors who are placing major bets on China’s cloud-based communications sector. Cloopen has previously said that the sector was worth 35.7 billion yuan in 2019 and was expected to grow about 23% annually to reach 101.5 billion yuan by 2024.

Venture capital powerhouse Sequoia Capital was an early investor in the company, while the Ontario Teachers’ Pension Plan Board and Cloudalpha Capital Management Ltd. in Hong Kong have taken stakes more recently.

Cloopen, founded in 2012, has called on everyone for patience, stressing that growth is its biggest focus right now over profits.

“The number one priority is to get more market share,” Li said on the earnings call when asked about a timeline for breaking even. He declined to speculate on when the company might turn a profit.

Aggressive investments in business operations, technology and marketing will likely continue to keep the company in loss territory as it tries to grab market share. Cloopen’s cost of revenues rose 36.8% in the second quarter from the same period a year ago. It is also somewhat strangled by heavy telecommunications costs.

Twilio, founded in 2008, enjoyed robust revenue growth of 67% in the second quarter but also remains loss-making. Meanwhile Alibaba Cloud, the cloud-computing arm of Chinese e-commerce giant Alibaba, turned a profit for the first time in its final quarter of 2020 after being in business for more than a decade.

But it’s worth noting that Alibaba Cloud has far larger resources from its behemoth parent that is one of the world’s biggest companies by market value. Alibaba also hasn’t clearly stated on what basis its cloud unit finally became profitable, since it’s not required to make separate reports for such individual units.

Moving back to Cloopen, the company could look quite attractive at its current valuation if you believe its leadership team can carve out a profitable niche in China’s fast-growing cloud market. It trades at a cheap price-to-sales (P/S) ratio of 4.7 compared with Twilio’s far higher 25. Chinese data center operators Chindata Group and GDS Holdings also have higher P/S ratios of 11.7 and 9.5, respectively.

Cloopen CEO Sun Changxun said on the earnings call he was confident about the company’s future, pointing to a $14.7 billion deal by video-conferencing platform Zoom last month to acquire Five9, a cloud contact center provider.

“This transaction is a clear signal that Cloopen’s strategic strength heavily focused on the CC business is on the right track,” he said. “We are excited to be expanding our footprint in this fast-growing market with huge opportunities.”

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