Conversational AI Adoption Will Create Lasting Market Opportunity

Key Takeaways

• Advanced conversational AI and industry-specific solutions are driving higher-value opportunities, premium pricing, market expansion, and improved client retention for Agora.
  
• Growth in digital engagement and remote work is boosting demand for Agora's APIs, supporting recurring revenue and long-term margin improvement.
  
• Leadership turnover, uncertain margins on new products, reliance on key customers, negative cash flow, and strong competition threaten Agora's sustainable growth and financial stability.

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.

• The rapid development and successful early adoption of Agora's conversational AI engine-demonstrated by major upgrades (advanced attention locking, real-time vision-based intelligence, interactive avatars) and real-world deployments in verticals like call centers, education, and companion toys-positions Agora to tap into higher-value embedded AI communications, supporting accelerated revenue growth and premium pricing potential.
  
• The expansion into AI-enhanced, industry-specific solutions (e.g., for customer service, education, and IoT) is unlocking larger addressable markets, increasing product customization, and strengthening client retention, which should enhance recurring revenue and reduce customer churn over time.
  
• Ongoing growth in real-time engagement and digital collaboration-fueled by greater adoption of remote work models and a surge in internet-connected devices-continues to raise demand for Agora's voice, video, and messaging APIs, providing multi-year tailwinds to topline revenue and customer growth.
  
• Margin expansion is anticipated as conversational AI products transition from early growth investment to steady-state, with the management expecting eventual gross margins at or above current RTC products and guidance forecasting improved net and operating margins as operating leverage sets in.
  
• Sustained share repurchases reflect management's confidence in undervaluation and capital strength, helping drive earnings per share (EPS) growth while maintaining the financial flexibility to invest in new product innovation and market expansion.

Agora Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Agora's revenue will grow by 10.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -16.6% today to 26.4% in 3 years time.
• Analysts expect earnings to reach $47.8 million (and earnings per share of $0.52) by about August 2028, up from $-22.2 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 14.4x on those 2028 earnings, up from -14.5x today. This future PE is lower than the current PE for the US Software industry at 35.0x.
• Analysts expect the number of shares outstanding to decline by 1.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.97%, as per the Simply Wall St company report.

Agora Future Earnings Per Share Growth

Risks

• The resignation of the company's CTO and Chief Scientist, who has been a core technology leader for 7 years, raises concerns over continuity in leadership and development, which could hinder Agora's ability to sustainably innovate and compete in the fast-evolving conversational AI and RTC market, thus risking slower revenue and product growth.
  
• Despite recent profitability, the company continues to exhibit negative operating cash flow, suggesting underlying challenges in achieving sustained, self-funded growth and posing potential risks to long-term earnings and financial stability if revenue growth slows or margins compress.
  
• The outlook for the gross margin of the new conversational AI product is still highly uncertain; management noted it could be lower in the near term due to ramp-up and prototyping costs, which may pressure overall margins and delay earnings inflection should adoption or pricing not meet expectations.
  
• The company's revenue growth remains partially dependent on fluctuations in customer usage and vertical-specific success, indicating a lingering risk of high customer concentration and earnings volatility if major clients or high-growth niches don't scale as anticipated, potentially impacting predictable recurring revenue.
  
• While the company highlights ongoing product innovation and positive reception at industry events, it faces intense competition from large integrated platforms (such as Google and Microsoft) and a trend towards commoditization of RTC and AI engagement software, which could erode its pricing power, gross margins, and revenue growth over time.

Valuation

• The analysts have a consensus price target of $6.2 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 $7.4, 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 $181.4 million, earnings will come to $47.8 million, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of $3.53, the analyst price target of $6.2 is 43.1% 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.