Regulatory Risks Will Stall AI Market Progress Yet Hope Lingers

Key Takeaways

• Expansion in AI-powered engagement and developer ecosystem boosts long-term potential, but uncertain adoption and rapid commoditization threaten sustained revenue and margin growth.
  
• Geographic concentration and evolving regulatory risks, especially in China, increase compliance costs and create obstacles to stable international market expansion.
  
• Slow adoption of new AI products, fierce competition in China, regulatory risks abroad, and high R&D spending threaten revenue growth, margin stability, and long-term profitability.

Catalysts

Through its subsidiaries, engages in the operation of a real-time engagement platform-as-a-service in the United States, the People’s Republic of China, and internationally.

• While Agora is benefiting from ongoing digital transformation and the growing adoption of AI-powered real-time engagement technologies across key sectors like live commerce, education, and IoT, the readiness of these verticals to reach true product-market fit remains uncertain and could delay the pace at which customer adoption accelerates, thereby tempering the company's ability to drive sustained top-line revenue growth in the near future.
  
• Despite healthy revenue expansion outside of China and initial signs of adoption in developed markets, Agora continues to face significant geographical concentration risk. Unpredictable regulatory actions and lingering cross-border data restrictions, especially for a China-based provider, could restrict market access and lead to interrupted or slower revenue growth, while also increasing compliance costs and placing further pressure on net margins.
  
• The company is making notable investments in Conversational AI and has achieved improvements in gross margin by focusing on higher-value verticals and technical efficiency, but the ongoing need for substantial R&D and infrastructure investment to keep up with evolving technology and customer requirements could suppress net margins for an extended period given competitive price pressures.
  
• Agora's impressive developer ecosystem momentum and traction with open-source projects highlight potential for long-term platform stickiness and recurring revenue growth; however, the rapid commoditization of real-time communication APIs and the availability of open-source solutions threaten to erode pricing power and shrink gross margins over time.
  
• Although consolidation in the Chinese market has eliminated some competitors and could benefit Agora's market share, the risk of global players-particularly cloud hyperscalers-vertically integrating communication APIs and bundling them with broader cloud offerings could make customer retention and acquisition more challenging, potentially slowing revenue growth and undermining the company's ability to sustain profitability at scale.

Agora Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Agora compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Agora's revenue will grow by 9.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -24.6% today to 23.5% in 3 years time.
• The bearish analysts expect earnings to reach $41.5 million (and earnings per share of $0.44) by about August 2028, up from $-32.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.3x on those 2028 earnings, up from -10.9x today. This future PE is lower than the current PE for the US Software industry at 38.1x.
• Analysts expect the number of shares outstanding to grow by 1.67% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.96%, as per the Simply Wall St company report.

Agora Future Earnings Per Share Growth

Risks

• The company acknowledges that product-market fit for Conversational AI solutions in various verticals is highly dependent on industry-specific knowledge and will take significant time to mature, meaning revenue growth from these products could be gradual and may not meet investor expectations in the near or medium term.
  
• Market expansion outside China, while showing promise, is still at early adoption stages, and sustained revenue growth is vulnerable to shifts in competitive dynamics globally and to potential geopolitical obstacles or increased regulatory scrutiny on cross-border technology providers, which could constrain both revenue and global customer acquisition.
  
• Agora continues to face intense pricing pressures and heavy competition in China, especially from domestic cloud giants; while some competitors have pulled back, the overall environment remains highly competitive with ongoing risk to gross margins and customer retention, particularly as market consolidation advances.
  
• Significant dependence on project-specific and vertical-specific adoption cycles, alongside customer-proof-of-concept phases that are slow to convert to scaled deployments, could lead to inconsistent revenue growth and reduced visibility into earnings stability and long-term top-line expansion.
  
• Despite recent profitability achievements following workforce restructuring and cost cuts, high R&D expenditure remains a large portion of total revenues, and any loss of operating leverage or inability to grow revenues efficiently may revert the company to net losses or erode long-term net margins and shareholder value.

Valuation

• The assumed bearish price target for Agora is $5.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Agora's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be $176.7 million, earnings will come to $41.5 million, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of $3.83, the bearish analyst price target of $5.0 is 23.4% 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.