Stock Pick of the Week: Agora ($API)
Will Agora be the next Twilio?
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Summary
👩💻Twilio for videos
📍Located in Shanghai + US
🗓IPO’d on Friday, June 26
🔥Stock up +145% on IPO debut
What is Agora?
Agora is like Twilio but for videos. Video transmission is a data/power hog (you might have noticed your computer fan/heat going crazy while on Zoom or Google Meet) and requires significant investment in improving the video quality and reducing latency at the infrastructure layer. Agora has built what they call a “Real-Time Engagement Platform-as-a-Service” to solve this problem for developers trying to add video into their application. This is great for developers because building this infrastructure themselves is incredibly difficult and they get to use Agora initially for free. Once their application takes off, Agora can scale with them effortlessly.
The company was founded in 2012 (only 8 years ago) by Tony Zhao (current CEO) and Tony Wang (current Head of APAC & Emerging Markets), and grew quickly, reaching $64 million in 2019 revenue, increasing 48% compared to last year.
Agora launched their IPO on June 26, initially priced at $20 per share but immediately jumped to $45 on the first trading day, reflecting strong demand to own Agora. Software share prices are mostly driven by revenue and revenue growth. At its current levels, Agora is trading at 81 times 2019 revenue of $64.4 million(!). For comparison, Twilio, which is up +120% on the year, is trading at 26 times 2019 revenue of $1.13 billion. We’ll take a deeper look at their business model, growth opportunity and risks to see it’s worth investing in Agora.
Did you know?
CEO Tony Zhao worked at WebEx from 1997 to 2004 as a senior engineer while Zoom CEO Eric Yuan was the VP of Engineering. WebEx was acquired by Cisco in 2007 and the product languished there, which caused Eric to leave and start Zoom. Both Zoom and Agora have their technology development office in Shanghai, China while U.S. headquarters for the former is in San Jose and latter is in Santa Clara. The similarities are quite interesting but their business strategy couldn’t be more different.
Fundamentals:
EV: $4.6B
Q1: Revenue of $36 million, +166% YoY
EV/Annualized Recurring Revenue (ARR): 32x
How Agora Makes Money
Agora’s revenue is primarily derived from usage-based fees earned when customers access any of the Real-Time Video, Real-Time Voice, Real-Time Messaging and Real-Time Recording services via their simple, programmable APIs. Additional revenue is derived from projects where custom integration may be required.
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Growth opportunities
This is the hottest year for video chatting applications. As COVID-19 hit, business switched to working-from-home and canceled most in-person meetings. As a result, many technology companies got a big boost in adoption. Last week we covered DocuSign ($DOCU) which focuses on e-signatures. Zoom ($ZM) has had an insane run since the beginning of the year, up 277%, as business is done over video calls. But not just in business, we see similar innovative changes in consumer products. Peloton ($PTON) is up 103% as people switch to working out at home. Just last week, Lululemon ($LULU) acquired Mirror to expand their at-home experience. Both offer video-based workout routines.
The common theme, irregardless of business or consumer, is that they all use video as a core part of their product. We believe that video is front-and-center of many products and services in the next few years, and Agora will stand to benefit from this growing trend. Agora indicated that there are four key focus areas: 1) social 2) gaming 3) retail and 4) education. Similar to Twilio, they will also continue growing their business by growing their developer community, investing in their partnership ecosystem, and expanding their focus on big enterprises.
Competitors / Risks
Competitors: Agora’s main competitors are Twilio ($TWLO) and TokBox (part of Vonage Holdings Corp.) in the US, and Tencent in China. Other open-source projects, such as WebRTC, are free and offer similar SDK capabilities. Some large customers might decide to build the solutions in-house to save on cost instead of buying from a vendor. This puts pressure on Agora to either 1) reduce price to fit a large company budget or 2) offer additional compelling features.
Expansion of customers: Currently, a substantial portion of Agora’s revenue comes from a limited number of customers. In 2018 and 2019, their top ten customers accounted for approximately 51% and 38% of revenue, respectively. Even losing a small number of customers could result in a big revenue hit. While keeping their existing customers happy, Agora has to expand to maintain their growth as the newest face in town, and invest in branding + marketing and developing a superior product in order to sell to larger enterprises.
Corporate Structure: A quick look at Agora’s corporate structure shows us that Agora is actually a holding company that conducts their operations through the WFOE and VIE in China and other international subsidiaries. It is an ownership controlled company - where Tony Zhao, the CEO actually owns 90% of the Variable Interest Equity (VIE). Because investors do not have direct control (see dotted line in the graph), in the event of bankruptcy, you as an investor must place significant faith in Tony Zhao to execute the contractual agreement and act in the best interest of both the VIE and Agora, Inc. This is a big risk for many Chinese listed companies, but especially important for newly-listed companies with a higher probability of bankruptcy.
Key Questions to Ask Yourself (before we think you should buy...)
Agora is similar to Twilio, and Twilio’s stock has been on a tear since its IPO in June 2016, up from $26 to $232 in the last 4 years. Twilio has witnessed tremendous growth in a similar field - do you believe Agora can follow the same trajectory?
Will Agora’s international presence allow them to grow in popularity among both the domestic and international markets to take over existing players? Will they successfully be able to brand and market themselves?
Our Take
Agora is definitely in a growing market and find it a plus that they are from the beginning, an international company, similar to Zoom. However, we believe that Agora’s corporate structure is definitely concerning and will wait to see how the price adjusts over the next few months as the company gets more scrutiny in the public market.
Note this is not investment advice. Please consider doing your own research before making any investments!
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