Advancing AI, Hardware And Ecosystems Will Shape Our Future

Key Takeaways

• Expansion into hardware solutions and AI R&D could drive smart device penetration and boost revenue growth across various sectors.
  
• Focus on global AIoT ecosystem and strategic international expansion is key for sustained competitive advantages and revenue growth.
  
• Early-stage AI integration and diversification into new fields may cause near-term revenue challenges and impact overall earnings due to margin pressures and execution risks.

Catalysts

Offers purpose-built Internet of Things (IoT) cloud development platform in the People’s Republic of China and internationally.

• Tuya's commitment to AI R&D, including launching proprietary AI large models and advancing on-device AI, aims to enhance smart product experiences and drive penetration of smart devices, potentially increasing future revenues.
  
• Expansion into hardware solutions beyond their traditional PaaS model allows Tuya to offer more competitive solutions across various verticals such as hospitality, real estate, and renewable energy, which could boost revenue growth.
  
• A focus on building a global AIoT developer ecosystem, including the development of AIoT open source solutions, is expected to create long-term competitive advantages and support sustained revenue growth.
  
• Continued investment in international market expansion, particularly in Europe, Latin America, and the Asia-Pacific regions, is likely to drive future revenue growth.
  
• Efficient management of operating expenses and strategic focus on key accounts have improved operational leverage, potentially enhancing net margins and profitability in the long term.

Tuya Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tuya's revenue will grow by 18.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 16.1% in 3 years time.
• Analysts expect earnings to reach $79.5 million (and earnings per share of $0.18) by about May 2028, up from $5.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $110 million in earnings, and the most bearish expecting $63 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.1x on those 2028 earnings, down from 237.5x today. This future PE is greater than the current PE for the US Software industry at 31.6x.
• Analysts expect the number of shares outstanding to grow by 1.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.71%, as per the Simply Wall St company report.

Tuya Future Earnings Per Share Growth

Risks

• The integration of AI into Tuya's offerings is still in the initial stages, with the company yet to finalize commercialization strategies, potentially impacting near-term revenue and margins as they experiment with the best market approach.
  
• Expanding into non-consumer fields and spatial solutions involves a structural shift that could introduce execution risks and affect revenue predictability and net margins due to uncertainties in these new applications.
  
• While diversification across regions and categories helps reduce concentration risks, it also demands significant resources and strategic allocation, potentially impacting future revenue and marketing expenditures.
  
• The company's developer ecosystem must sustain and grow to enable new AI-driven products, but early-stage AI adoption could affect revenue growth if new products do not gain market traction quickly.
  
• The changing mix in revenue sources, with an increasing share of lower-margin hardware solutions, may lead to overall margin compression, affecting earnings growth.

Valuation

• The analysts have a consensus price target of $4.1 for Tuya 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 $5.3, and the most bearish reporting a price target of just $3.2.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $494.4 million, earnings will come to $79.5 million, and it would be trading on a PE ratio of 37.1x, assuming you use a discount rate of 8.7%.
• Given the current share price of $2.2, the analyst price target of $4.1 is 46.3% 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.