Trailblazer Across Smart Technology,
Tuya 2023 Results Highlight First Profit, and More
Where will trends head in 2024 is the question I’m most asked recently. Compared to the confusion in the market in previous years, this year is characterized by a more headless lack of direction. In the field of smart technology, the wind changed at the end of last year, with many major companies shutting down parts of their IoT platform businesses, such as LatePost reporting that Alibaba Cloud began cutting down on projects that customize industry solutions for government and enterprise customers and downsizing its hardware integration business in the IoT business line and related personnel.In this regard, my answer is more optimistic. Every industry has its own maturity curve. Last year's successive exit news precisely indicates that smart technology is about to enter its next era - the first stage of excessive growth has passed, and it is inevitable that foam will be squeezed. The beginning of 2024 is filled with imagination. From a macro perspective, technology first shone its strength from AI technological innovations such as Sora and Gemini 1.5 Pro, causing a sensation in technology circles. Then followed the discussion of new quality productive force, depicting more certain development trends in smart technology. Focusing on the micro level, the intelligent industry has shifted from narrative to unleashing commercial value. For example, Tuya's Q4 and full year financial results for 2023 showed a significant year-on-year increase in revenue, turning losses into profits.
Next, I will use Tuya as an example to interpret which enterprises will grasp more opportunities in the second half of smart technology era, to clarify the direction of the smart technology market.
The Second Half of Smart Technology: On the Cusp of Entering the Climbing Stage
Tuya’s Q4 financial report shows that the company's revenue increased by as much as 42.2% year-on-year; the comprehensive gross profit margin broke historical records, and the net cash flow generated from operating activities increased to $31.8 million year-on-year. From a full-year perspective, 2023 achieved the annual Non-GAAP net profit for the first time. The company's performance took the lead in stabilizing the entire industry and achieved significant growth in the fourth quarter of 2023. As a representative enterprise in the intelligent industry, Tuya also reflects to a certain extent the development of the entire industry from its performance.
Tracing the development trajectory of technology, it can be roughly summarized in five stages: Innovation Trigger; Peak of Inflated Expectations; Trough of Disillusionment; Slope of Enlightenment; and Plateau of Productivity. There are two high-return periods for technology investment: the Peak of Inflated Expectations stage of rapid growth and the Slope of Enlightenment stage. However, the Peak of Inflated Expectations stage is the early stage of technological innovation, with extremely high risks. While during the Slope of Enlightenment stage, leading enterprises will be the first to rise in performance due to emerging new technologies, and correspondingly increasing industry valuations.
Returning to the field of smart technology: many believed that the Peak of Inflated Expectations stage of the industry was before 2021, and in the years since then, the industry has ushered in the Trough of Disillusionment stage. But by the end of 2023, there are signs that the market has headed onto a new stage.
Jerry Wang, Founder and CEO of Tuya Smart, said on the Q4 results conference call, "Over the past year, we've witnessed a global trend: an increasing number of influential companies worldwide are entering the smart technology arena, driven by competitive forces, industry opportunities, and their own strategic needs. This trend is especially pronounced in emerging markets such as Latin America and the Asia-Pacific region, where the awareness and adoption of smart technology are on a noticeable rise. "
From an investment perspective, the smart industry has undergone a thorough process of expected digestion, and there is already sufficient safety cushion for sector valuation. From a market perspective, for one thing, production capacity has been significantly cleared, freeing up development space for competitive players; for another, policy guidance for new quality productive forces and technological innovations such as AI are driving the smart industry into a more mature era of commercialization. The prelude to the second half of "pan intelligence" has already begun.
Pragmatic and Progressive, Tuya’s Strategy Leads to Revenue Growth
Many years ago, Tuya proposed that the ultimate scenario of the Internet of Things (IoT) would inevitably be the Artificial intelligence of Things (AIoT). Tuya clearly positioned itself on a neutral, "pan intelligence" base from the beginning. The company does not stand in front of the stage, but has always been behind the scenes, driving the AIoT with innovative technologies, striving to become the best partner for every enterprise with needs of smart technology. It provides cutting-edge technologies such as IoT, AI, and cloud computing to help customers build diversified smart business scenarios, sparing no effort in helping customers succeed. In the meantime, Tuya will also share its expertise in IoT, AI, and cloud computing technologies with more developers. It is thereby born to empower the pan intelligence.
On this basis, Tuya in 2023 has done at least two things to seize such opportunities: focusing on major customers at globally, and enhancing its product offerings. This means abandoning the extensive commercial route adopted by the public and focusing on cultivating intelligent fields with high value and high potential.
The essence of a "key-account strategy" is to focus on customers with high potential and efficiency. It is obvious that the key accounts are often the main forces of industry transformation. Thus, Tuya chooses to meticulously cultivate major customers, deeply understand the needs of high-quality customers, and therefore uncovers higher intelligent value. For example, Tuya, along with major clients such as Midea and Haier, has continuously expanded into diverse fields such as energy and whole house, exploring opportunities for business collaboration, and working together at the forefront of the market to meet market demand at a faster pace.
Moreover, Tuya’s inherent global genes also make its customer base more risk-resistant. In recent years, Tuya has been balancing its global customer layout, expanding its reach to customers like Brazil’s top operator group Vivo and one of the largest chain supermarkets in Latin America, Choppies, among others. Leveraging the globally recognized Cube Cloud smart private cloud solution, it has secured orders from giant groups such as China Gas, Indonesia’s Telekom, Thailand’s SCG, a leading telecom group in Malaysia, and Germany's century-old shipbuilding company, supporting these key accounts to realize their smart businesses.
The essence of ‘product enhancement’ is to expand high-value smart solutions. By building a stronger and more focused product matrix, all three business lines of Tuya have posted strong growth in revenue, among which, the "smart device distribution" sector in Q4 achieved approximately $7.8 million in revenue, a year-on-year increase of 64.6%, with the gross margin has gradually increased from around 10%-15% in 2022 to around 30%. The main source of revenue for this sector before 2023 came from providing supply chain related services of smart device business to customers, but in 2023, it has successfully transformed into providing higher-value smart solutions under the strategy of product enhancement. The revenue of IoT PaaS business, SaaS and other business came in at $47.2 million and $9.5 million, respectively, with year-on-year growth of 44.6% and 19.3%, and gross margins of 44.8% and 74.2%, maintaining stability. The revenue and gross margin of the above sectors have steadily increased, pushing the overall gross margin of Tuya to 47.3% in Q4, setting a new all-time high for the second consecutive quarter.
With the focus on "high value", Tuya ended the past year with strong momentum powered by consecutive quarterly growth.
Morgan Stanley released a report stating that Tuya's revenue and profit margin for the fourth quarter of 2023 significantly beat expectations, reiterating its overweight (OW) rating for Tuya and further raising its target price to $3, with approximately 50%-60% upside from the current price. After achieving a year-on-year revenue growth rate of 35.7% in the third quarter of 2023, Tuya recorded revenue of $64.4 million in the fourth quarter, a year-on-year increase of 42.2%, which is the fifth consecutive quarter on quarter improvement in revenue, and it entered a relatively normal seasonal business cycle, emerging from the industry's harsh destocking and high inflation. Meanwhile, the company reported continuous improvement in operational efficiency, with an overall gross margin increased 2.7 percentage points year-on-year to reach 47.3% in Q4, and an overall gross margin for the entire year of 2023 increased 3.4 percentage points year-over-year to 46.4%. The non-GAAP net profit margin for the whole year stood at 8.9%. marking the company’s first annual profit turnaround.
The company's has also significantly improved operating cash flow continousely. In Q4, net cash generated from operating activities reached approximately $31.8 million. As of the end of Q4, the total net cash of the company was as high as $984.3 million, while its recent total market cap hovers around $1.1 billion – effectively providing a financial safety cushion. Morgan Stanley pointed out that Tuya's current trading price is only 12% higher than its net cash, indicating a low single-digit P/E ratio (excluding cash) for 2024.
This indicates that at present, Tuya has been significantly undervalued, either in growth potential or market price.
Tuya in the Next Era, Customers First, Business Follows
From a short-term perspective, destocking has tended to come to an end. Starting from the third quarter of last year, downstream inventory began to normalize, and inventory levels have returned to healthy levels. Jessie Liu, Board Director and CFO of Tuya Smart, noted that the fourth quarter marks the transition of Tuya from recovery to growth, efficiency improvement, and profit expansion. Given that Tuya focuses on operational efficiency and inventory backlog has become a thing of the past, there is an opportunity for the company's fundamental turning point to resonate with the macro environment turning point, making the near-term prospects promising.
Looking at the longer cycle, the global process of pan intelligence has embarked on the second half, a better and broader space for development. As AI, 5G, and IoT integrate into every aspect of life as infrastructure, an increasing number of AI technologies will migrate to or merge with smart devices, creating unprecedented new opportunities. Morgan Stanley highlighted that, the globalization of Tuya customers and the diversification of product distribution, as well as the enhancement of competitiveness, constitute the cornerstone of its positive future outlook.
Looking back at the previous era, Tuya’s growth outpaced other players, securing a leading market competitive position among giants, and marking itself one of the first players to pass the test on this track.
In the new stage, with leading ABC (artificial intelligence, big data, cloud) technology, rich software and hardware capabilities such as smart device product matrix, as well as a globally leading platform ecosystem, Tuya also embraces a vast field beyond consumer electronics, constantly breaking through the imaginative boundaries of pan intelligence.
For example, in response to the ESG energy field in recent years, Tuya has efficiently launched Home Energy Management System (HEMS) and diversified solutions in Europe and the Asia Pacific region, receiving favourable market feedback. In the fourth quarter, Tuya further enhanced its presence in smart heating and temperature control ventilation application, creating innovative products and making good business development progress; Tuya also strengthened its Energy-Saving Dashboard mini-programs and smart temperature control valve solutions, combining energy-saving algorithms in heating applications with Tuya's advanced cloud algorithm capabilities, and pairing them with more intelligent and precise temperature control devices.
As an intelligent platform, Tuya will continue to back global customers and partners, helping them achieve their intelligent business roadmaps in a highly efficient and valuable way. Ultimately, the commercial success of more global customers in the smart field through Tuya will also feed back into the sustained growth of Tuya's value.
Conclusion
In a nutshell, there is a relatively accurate conclusion on the direction of 2024. Smart technology is a clear development path, with the boom of technologies such as AI, IoT, and cloud computing, as well as policy guidance such as new quality productive force.
Smart technology has gradually entered a mature stage, and the market is starting to look at tangible results. Tuya, which has stood firm in the storms of the past few years and is now demonstrating profitability amid emerging optimistic prospects, reveals the future path of intellectualization - platform-based enterprises will become the cornerstone of the intelligent industry.
Meanwhile, the path chosen by Tuya deserves attention: becoming the ground for customer innovation, fully supporting more customers to enter the era of smart technology and achieve commercial success, lowering the threshold for smart technology, making entry and innovation accessible to everyone, and promoting the popularization of intelligent application scenarios such as Killer App.
The prosperity of smart technology requires the continuous effort of platforms like Tuya to make smart technology from building complexity to becoming more simplified and more inclusive, providing more enterprises with the entrance key to the AI smart business era. In the second half of smart technology development, everybody has the chance to play, so the potential for the platform value-add is readily apparent.
