Generative AI And TEN Will Shape Future Markets

Key Takeaways

• Generative AI presents a key opportunity for Agora, enhancing real-time engagement technology and potential revenue through voice-based AI interactions.
  
• Strategic cost management and market expansion in high-growth areas aim to sustain profitability and drive revenue growth.
  
• Competitive pressures, regulatory changes, and uncertainties in AI adoption limit Agora's revenue growth, customer retention, and earnings potential.

Catalysts

Operates in real-time engagement technology business in the People’s Republic of China, the United States, and internationally.

• The generative AI revolution is seen as a significant opportunity for Agora due to its real-time engagement technology, which could drive future revenue growth through new use cases in voice-based AI interactions.
  
• The Transformative Extensions Network (TEN) and the newly launched conversational AI engine are poised to accelerate the adoption of conversational AI, potentially increasing Agora's revenue by expanding into new markets and applications.
  
• Agora's strategic focus on operational efficiency and reducing operating expenses is expected to support its net margins and maintain profitability in the coming years.
  
• Continued business expansion in high-growth verticals such as live shopping, entertainment, and digital transformation is anticipated to contribute to top-line revenue growth.
  
• The extension of the share repurchase program reflects management's confidence in the company’s long-term growth potential and could enhance future earnings per share (EPS) by reducing the number of shares outstanding.

Agora Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Agora's revenue will grow by 11.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -32.1% today to 8.6% in 3 years time.
• Analysts expect earnings to reach $16.0 million (and earnings per share of $0.17) by about April 2028, up from $-42.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 46.3x on those 2028 earnings, up from -6.2x today. This future PE is greater than the current PE for the US Software industry at 29.6x.
• Analysts expect the number of shares outstanding to grow by 1.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.06%, as per the Simply Wall St company report.

Agora Future Earnings Per Share Growth

Risks

• The competitive pressures in their core communications segments could potentially constrain revenue growth, especially if Agora is unable to capitalize on emerging markets and sustain momentum in new areas like live commerce. This could impact future revenue growth.
  
• Regulatory changes and general economic conditions have been noted as factors causing a slowdown in demand from the social and entertainment verticals, which may limit revenue and pose a risk to sustained earnings growth.
  
• Despite the excitement surrounding conversational AI, there is significant uncertainty around the timeline for widespread adoption due to immature tools and methodologies, which could limit potential revenue growth and affect earnings.
  
• The company's dollar-based net retention rate, especially that of Shengwang at 79%, indicates potential challenges in retaining existing customers or growing revenue from them over time, which can impact overall revenue and profitability.
  
• The AI-driven opportunities, while promising, are still in the experimental stage and may take considerable time to generate significant revenue, challenging Agora’s ability to maintain rapid growth and affecting future earnings and net margins.

Valuation

• The analysts have a consensus price target of $6.05 for Agora based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.1, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $185.0 million, earnings will come to $16.0 million, and it would be trading on a PE ratio of 46.3x, assuming you use a discount rate of 8.1%.
• Given the current share price of $2.82, the analyst price target of $6.05 is 53.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.