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Agora to Clubhouse: We're No Fan of This Club
An article by • Published May 5, 2021
Amazon is a bad investment because they don't make any money Apple is toast because they missed the boat on large screen phone format Facebook stock at IPO is short because they have no mobile strategy Clubhouse lost the audio chat war
OK, the title may be tongue in cheek. Agora $API surely loves Clubhouse as a customer, but the perception that API will fail or succeed with Clubhouse has to be difficult to stomach. Clubhouse exists because of Agora, not the other way around.
Clubhouse may indeed lose out to the smorgasbord of audio chat options being built or offered after their success, but the idea that it has lost already may also be premature, just like many predictions in technology over the years.
Twitter, Facebook, Linkedin, Reddit, Discord and Spotify are among the many companies building or offering live audio creation tools and content to its users and creators. The $SPOT CEO recently said that every major platform will adopt live audio, just as Instagram Stories was replicated. Real-time communications ("RTC") becoming global, expected, native features in consumer and enterprise applications is a good thing for $API any way we look at it given their usage-based model. They are in the pole position for exposure to the trend.
Agora stock has round-tripped the 'Clubhouse hype' move the last few months, as the market views Clubhouse ("CH") as dead in the water, unable to compete with larger companies or continue growth in a post-pandemic world.
Of note:
CH growth has indeed slowed materially per published reports and app download data
Some of the growth slowdown is intentional. CH management has repeatedly discussed moderating and balancing growth during Town Halls on the platform, acknowledging many of the known issues - poor room discovery & promotion and the need for additional content creator tools and monetization features
On a May 2nd update, CH noted Android BETA testing has begun, with further rollout to Android users in the coming weeks - roughly 75% of the world hasn't been able to use or try Clubhouse, that is changing in the very near-future
Agora's stock has suffered meaningfully in the same growth rotation and multiple compression the rest of SaaS has, but after the recent move lower, It would appear the market is pricing in little-to-no value for CH success in API stock
It appears
Blackrock purchased
a $250 million block of Agora stock on 2/1/21 at a price of roughly $52.50; the
press release
and 13G (comparing change in shares vs 12/31) can be used to back into the estimated block price; as a 7.9% holder, they have room to add to dollar-cost lower

Agora to Clubhouse: 'We're No Fan of This Club'

Whether the company and investors like it or not, Agora stock is currently tied at the hip with Clubhouse and its success.
That makes little sense. 
As forecasted in a prior piece, Clubhouse was never going to be material to Agora in 2021. Further, modeled CH 2021 revenue for $API of $7.8 million didn't take volume discounts into consideration (which API
in its 20-F)
Consistent with the idea 2021 CH would not be material,
management cautioned
on baking in too much upside this year from the format
It is highly unlikely the Street has meaningful CH revenue in its numbers for 2021
CH has been moderating growth through their invite system and was until recently iPhone-only
Agora was growing at 74% y/y at 4Q20 when CH was at approximately 50K users in mid-November; it was a fast growing company long before most of the world had heard of Clubhouse and its usage-based revenue model typically provides solid customer revenue expansion
API is facing a 'growth hiccup' this year which has allowed additional concern to creep into the stock. 1Q/2Q comps are brutal due to usage-based revenue from online learning in China as COVID containment began. FY21 guidance implies only 35% growth +/-. The 1Q and FY guide, however, imply growth of 50% +/- in 2H21. That back half growth allows for Street estimated growth of 47% in FY22; get past the current quarter and growth will begin to accelerate with or without CH growing materially

Agora Stock Concerns

Among others:
Valuation - continued rotation out of growth and software leading to multiple compression; on a relative basis, API doesn't appear stretched relative to its high-growth SaaS peers with the 2nd highest FY+2 growth rate and 2nd lowest revenue multiple. If you believe revenue is closer to $290 million next year, which is reasonable, the stock is at 16.6x FY22 revenue that will be growing at >50%..... $40 would be 13.2x to try to frame the downside
Gross margins - GMs have been sliding and will likely need to find a bottom for the stock to really work; building out a network is costly
Product-market fit for customers and potential customers. In-app, real-time communications will become ubiquitous over time in our opinion, but the technology and its usage patterns may be early in their life cycle, creating lumpy or inconsistent revenue; API's api's could be 'too early' - indeed the company has a posting on Linkedin for a "Demand Generation/Growth Marketing Manager" role
China concerns - we don't view $API as a typical Chinese stock, with dual HQs (Santa Clara and Shanghai), many US-based employees, CEO Bin Zhao's involvement at Webex and a global network of developers and customers who vouch for the product; a US-based CFO and messaging around the Chinese audit firm certification that will impact most Chinese stocks in 2-3 years would provide comfort
Back-to-work, the reversal of work-from-home, has a larger impact on usage than anticipated

Potential Upside Events

Stay with me here. Clubhouse is successful. This option now appears underpriced. The audio focus and big-name involvement allow the platform to prosper and carve-out meaningful social graphs for users in the audio chat space, letting it grow into 100 million or more global weekly users; this option appears to be underpriced at the moment given CH revenue can be meaningful. It is highly likely Android is coming to CH faster than Agora anticipated in its 2021 guidance as CH responds to Twitter rolling an Android version of Spaces out
Agora involvement in other audio-chat efforts. With its usage-based model, API needs exposure to usage and minutes; its efforts and involvement in RTC and audio chat may be broader than the market is pricing in; as an example, Figma used Agora to quickly build audio chat into its design product

Agora co-founder Tony Wang Zhau highlighted a Spotify story on Linkedin recently, which could be a way to highlight a $SPOT logo win despite non-disclosure agreements; Spotify recently purchased Locker Room - a CH lookalike; the small team at Locker Room doesn't appear to include any audio engineers, so its a high probability their audio engineering was outsourced.
API has exposure to education, social, gaming, telehealth and virtual events but the use cases may continue to expand:
Experience Welcome (website), a virtual events platform that lists the world's largest asset manager as a client was built on Agora
popshoplive is a live streaming commerce platform built on Agora; a similar platform, Shop LIT Live just announced funding, with its founder an ex-Agora investor; both are attempting to bring the China live shopping phenomena to the US
Agora has business development postings for the future of its OTT (over-the-top) offerings; it is not hard to imagine capturing and broadcasting content produced on the Agora networks
API has exposure to live dating, which is standard on nearly all dating apps now
The company has alluded to breaking its business into China and non-China arms to provide further insulation and distance from real or perceived risks; such a move would likely be viewed positively

Other Thoughts & Notes From Discussions

Agora's biggest advantage is its software-defined real-time network (SDRTN). Unlike WebRTC, the network is native and proprietary. The POPs/nodes are aware of and monitoring each other and have a managed layer. The fastest route might not be a direct path; algorithms decide. $NET and $FSLY good comps
Whereas WebRTC relies on the public network, Agora can better manage network degradation in real-time; re-route around interruption dynamically providing reliable service delivery; XLA for service uptime is rare
Agora has allegedly never had system wide outage; for mission-critical information one can imagine use cases for more than voice and video; they are in some ways re-designing the public internet for communications like AWS did for cloud; potential to become 800-lb gorilla in communications
1-to-1 WebRTC doesn't need; if you are a company with revenue that relies on service quality, uptime, latency and quality of experience matter
Not just reliability; can lose wrong package at wrong time
Reliability AND real-time quality critical to solve for
Real-time latency opens up the door for all sort of new monetization opportunities; many things can't happen with latency; real-time opens up new ad engines; auction or exchange massive online open course or auction; virtual gifting; co-watching; associated revenue streams; unlike traditional media - embed in real-time experience, embedding AI into digital experience; sub screens
Not hard to do a working video call. WebRTC is open-source, costs nothing and any developer can do in a week. Challenge is commercial grade product, need to make it reliable. Out of 10k calls, how many are at quality. Pure WebRTC can work 80-85% of the time, Agora's solution is 99.9%. The technical edge involved is long hours of solving for corner cases; hardware is not part of the effort
It's not practically for everyone to interact in many-to-many situations, but preserving options for the audience to interact is hard, can create latency, etc.
Daily, Tokbox, Sinch, $TWLO deploy managed network elements to improve reliability and stability from Web-RTC. Some may view this as sufficient and in general this improves things, but there are still underlying challenges with WebRTC which make it questionable as a transport. The protocol has a quality monitoring algorithm which is woefully insufficient. 30 second latency; and there is no dynamic channel support mechanism (ie if any party in the session loses connectivity, even for a few MS, the participant needs to completely reinitialize the client and request access back into the channel, assuming the channel wasn't destroyed)
Agora, $ZM , $MSFT, $CSCO all have dynamic channel management built in. Meaning catastrophic degradations won't kill channels, as soon as the degradation is resolved, participants reenter the channel automatically. In most cases the participant never knows they dropped, they will just see a few frozen frames; as we move into IoT, AR/VR, AI, advance recording etc. this dynamic channel support mechanism becomes integral and must have.
Zoom not really competition after investing heavily to connect with legacy enterprise video conferencing; Agora supports every device on planet with hyper-low latency; would need radical redesign
$MSFT and $AMZN perhaps make the most sense as acquirers

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