In a move that highlights how open the American IPO window may be at the moment, China-based Agora priced its public offering at $20 per share last night, ahead of its $16 to $18 proposed price range. (Update: As noted here, the company has a second HQ in California.)
At $20 per share, the 17.5 million shares sold in its debut raised $350 million, a huge haul for a company that reported around 10% of that figure in Q1 2020 revenue. Provided that your humble servant is doing his Class A to ADS share conversion calculations correctly, Agora is worth about $2 billion at its IPO price.
Agora raised well over $100 million while a private company, backed by GGV Capital, Coatue and others, according to Crunchbase data.
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Agora is an API-powered company that allows customers to embed real-time video and voice abilities in their applications; appropriately, the company’s ticker symbol in America will be “API.”
With an annual run rate of $142.2 million, a $2 billion valuation gives Agora a run-rate multiple of around 14x. That’s rich, but not stratospheric. Perhaps Agora wasn’t able to command a higher multiple due to its sub-70% margins (68.8% in Q1)?
Agora’s financials make its IPO pricing a neat puzzle, so let’s pull apart the good and the bad to better understand why the market was willing to pay more than the company anticipated.
After that short exercise, we’ll make note of the current IPO climate, inclusive of what we learn from Agora. (Spoiler for unicorns out there: Things look good.)
The good, the bad, the odd
We can’t calculate Agora’s enterprise value with confidence until we get updated filings. But taking into account the company’s pre-IPO cash and liabilities, its implied enterprise value/run rate is something around 13x. (That figure will dip if the company’s shares don’t rise after its debut, as its cash position rises from its share sale; more on enterprise values here.)
We bring all that up as the Bessemer Cloud Index (EMCLOUD) has a current average enterprise value/run rate multiple of a little over 17.3x. That’s far above what Agora was able to command while pricing its IPO.
The EMCLOUD/Agora delta felt a little surprising, so let’s go over the company’s SaaS-ish pros and cons to get a better feel for its strengths and weaknesses.
We’ll start with the good:
- Growth: +166% from Q1 2019 to Q1 2020.
- Dollar-Based Net Expansion Rate: 135% in calendar 2018, 131% in calendar 2019.
Next, we’ll turn to the less-than-good:
- Gross margins: ~69%, Q1 2020 (lower than what we expect from API-powered and SaaS companies).
- Gross margin trend: Flat (if this was trending north, Agora’s current gross margins wouldn’t be as large of a matter).
- Rising net losses: From $13.4 million to $36.4 million in Q1 2019 and Q2 2020.
And, finally, the odd:
- Net losses before costs related to preferred shares: $2.5 million and $3.4 million in Q1 2019 and Q2 2020.
So the company’s growth rate is tremendous, even if its gross margins are middling. But, it appears that Agora’s net losses are largely driven by noncash costs (those preferred-share costs). Let’s see if that holds up when we look at the firm’s free cash flow and adjusted EBTIDA:
- Free cash flow: +$2.9 million and -$3.4 million, in Q1 2019 and Q1 2020
- Adjusted EBITDA: $720,000 and $5.5 million, in Q1 2019 and Q1 2020
A-ha.
So what we can really see is that Agora’s growth rate is not fueled by staggering spend, but instead is built on modest cash burn and rising adjusted profitability. Agora is in far better shape than a cursory look at the bottom of its income statement might have you think!
What to make, then, of its IPO valuation? I’d say that it almost feels slightly light, given what we’ve seen from post-IPO companies on the public markets. Investors will tell us in short order what to think when Agora starts to trade later this morning. But, for now, we can describe its pricing cycle as a net-positive. The firm is losing more money as it grows and it is still pricing at a revenue multiple well above 10x.
What about the rest of the IPO market?
Given that Lemonade appears set to defend most of its private valuation, Vroom is still up more than double its debut price, ZoomInfo is up sharply as well, and on and on and on, how can we say anything negative about the IPO market today given the diversity of tech companies that are going out?
On top of those successes, the pretty-good Agora pricing run appears to cement the fact that public investors appear to want companies to go public, given how they are responding to tech and tech-ish companies.
The water is warm; who will be too scared to get wet?
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