Agora Stock: Missing A Turnaround Catalyst (NASDAQ:API)

Agora Inc. (NASDAQ:API) specializes in real-time engagement technology used by software developers to integrate communications features like voice calling, video streaming, and chat across online platforms. The China-based company counts on several high-profile customers covering use cases in gaming, e-commerce, social media, and education. Recent innovations include efforts to add AI tools.

At the same time, profitability has been elusive amid weak growth and poor trends in key financial metrics. Indeed, management cited a “very challenging operating environment” in its latest quarterly report as shares are now down more than 35% in 2023 near an all-time low.

Recognizing some strong points in the company’s profile including a solid balance sheet with zero debt, we don’t see much reason to get excited about the stock. We expect shares to remain under pressure with risks tilted to the downside until there is some evidence of stronger operating momentum.

API Financials Recap

API reported Q1 non-GAAP EPADS of -$0.45, representing a net loss of -$6.6 million narrowed from -$20.8 million in the period last year. The driver here was the impact of lower expenses following a restructuring with the exit of certain business lines.

Following China’s regulatory shift toward the education sector, Agora discontinued certain products that have dragged the top line. There was also the disposal of the company’s “Customer Engagement Cloud” business.

Efforts to streamline and focus on core competencies have at least worked to stem the losses. The adjusted EBITDA margin at -19.5%, compares to -37.4% in Q2 2022.

Total revenue of $34 million, declined by -16.9% year-over-year. Within that amount, “Agora” segment sales decreased by -5.6% while the “Shengwang” group posted an -19.8% decline from Q2 last year.

These drops occurred even as the number of active customers reached 5,552 total, up 9.8% year-over-year. Nevertheless, management noted a decrease in usage and lower pricing by certain customers as contributing to the quarterly weakness.

Operationally, management has noted some customer wins demonstrating the value-add proposition of the service. A use case where Agora tools have been leveraged effectively includes the social network “Astrotalk”. The platform added an Agora video broadcast feature allowing astrologers to communicate with multiple potential customers simultaneously driving a significant climb in engagement. From the earnings conference call:

The objective was to create a platform that would show astrologers providing live predictions to clients. When customers observe others talking with the astrologer, they are more inclined to engage with the same astrologer. As a result, Astrotalk has experienced a remarkable threefold growth in active sessions following the launch of this feature.

Within the AI space, Agora launched this year a tool that is capable of virtual noise impression in audio and video, to enhance content creation and the end user experience.

Separately, a recent development into Q2 was Agora’s partnership with U.S.-based “ActiveFence”, a leader in AI detection. The idea here is that within the Agora software developer kit and extensions marketplace, clients can access ActiveFence tools integrated into real-time video content for moderation accessing threats like bullying, harassment, hate speech, and violence for example.

In terms of guidance, Agora is targeting Q3 revenues between $34.5 million and $36.5 million, representing a -13% decline y/y, but also the first sequential quarterly increase since Q2 2022. While maintaining a cautious tone citing current conditions, CEO Zhao Bin is confident about the company’s long-term prospects.

We mentioned the balance sheet as a company strength. Agora ended the quarter with $392 million in cash, equivalents, and liquid investments against zero debt. On this point, the company has been active with buybacks, repurchasing $21 million in ADSs in Q2 with approximately $140 million remaining under the existing authorization.

What’s Next for API?

The way we understand API is that its software-as-a-service solution offers app developers a customizable toolkit to integrate these types of “real-time experience” functions without starting from scratch. It’s impressive that companies like Hewlett-Packard (HPE) and gaming giant Unity Software Inc. (U) are noted as customers choosing Agora solutions.

That being said, the current operating and financial trends don’t inspire much confidence. There simply doesn’t seem to be enough growth for the company to reach sustainable profitability or even break even on a cash flow basis for the foreseeable future.

The software development toolkit may be a good option for app startups today by industry standards, but it will likely require significant investments on the R&D side to remain competitive next to alternative solutions from larger tech players.

So with that, current consensus estimates should be taken with a grain of salt. The market forecast is that Agora revenues will climb by 19% in 2024, and a 25% increase in revenue in 2025. This is expected to help narrow a 2023 EPS loss of -$0.63, towards -$0.23 in 2024, and -$0.08 by 2025. The bearish case for API is that there is a downside to these estimates.

API Stock Price Forecast

We’re taking a bearish view on API and see a good chance the stock will ultimately be trading lower this time next year. Agora’s current profile has the feather of benefiting from a strong balance sheet which could limit the near-term downside in the stock, but the combination of no growth and recurring losses typically doesn’t make for a good investment case.

From the stock price chart, approaching a 52-week low, there is an argument to be made that the outlook is weaker now than when shares traded at the same level in May. Beyond a technical bounce, API is missing a catalyst that could sustain a major rally. We want to see the company do more to reclaim operational momentum.

In terms of risks, let’s not forget the company’s connection to China which adds a layer of regulatory uncertainties, which played out already in the services related to the education industry. Weaker-than-expected results over the next few quarters would open the door for a bigger correction. Monitoring points over the next few quarters include the adjusted EBITDA margin and cash flow trends.