Agora, Inc. (API)

Executive Summary / Key Takeaways

• Agora has achieved a remarkable operational turnaround, delivering four consecutive quarters of GAAP profitability through disciplined cost management while simultaneously building a conversational AI engine that management expects will generate "sizable" revenue in 2026 at pricing "an order of magnitude higher" than its core real-time engagement products.

• The core Real-Time Engagement business has stabilized as a "profitable foundation," with Q3 2025 revenue growing 12% year-over-year and net retention rates improving for the fourth straight quarter, demonstrating that the 2024 workforce restructuring has created durable operating leverage rather than temporary cost cuts.

• Conversational AI represents a genuine inflection point, with usage surging 150% quarter-over-quarter in Q3 2025 and early customers moving from proof-of-concept to production in call centers, education, and companion IoT devices, though management candidly acknowledges that "it will still take a long time for sophisticated agents to be built and launched."

• Agora's competitive moats—proprietary SDRTN technology for sub-200ms latency, deep Asia-Pacific infrastructure, and vertical-specific extensions—position it to capture share in AI voice agents where latency and reliability are non-negotiable, but the company remains vulnerable to scale disadvantages against Twilio and bundling threats from cloud giants.

• The investment thesis hinges on execution timing: whether Agora can convert its AI pipeline into meaningful revenue by late 2026 while maintaining core RTE growth, with key monitoring points including customer transitions to production, net retention trends, and the pace of AI product maturation across vertical use cases.

Setting the Scene: The Real-Time Engagement Platform Evolving Into AI Infrastructure

Agora, Inc., incorporated in 2013 and headquartered in Santa Clara, California, built its business solving the hardest problem in real-time communication: delivering consistent, low-latency video and voice engagement across thousands of device types and network conditions through its proprietary Software-Defined Real-Time Network (SDRTN) . The company generates revenue primarily through usage-based fees on its platform-as-a-service, where developers embed video calling, interactive live streaming, and chat into applications spanning live shopping, social entertainment, education, and IoT devices.

The industry structure highlights the significance of this. The Communications Platform-as-a-Service (CPaaS) market features dominant players like Twilio with massive developer ecosystems, Zoom leveraging brand strength in video, and Bandwidth focusing on regulatory-heavy voice services. Against these larger rivals, Agora carved out a defensible niche by optimizing for global latency and Asia-Pacific infrastructure, capturing Chinese companies expanding overseas and applications where milliseconds matter. This positioning proved resilient but not immune to macroeconomic pressures, regulatory shifts in China, and pandemic-era volatility that strained growth and profitability.

Entering 2024, Agora faced a critical juncture. Years of investment had built a robust technology stack but had not translated to consistent profits. Management made a decisive choice in November 2024: reduce the global workforce to cut costs while simultaneously accelerating investment in conversational AI, betting that the generative AI revolution would create demand for real-time voice agents that only Agora's infrastructure could reliably support. This dual strategy—pruning the core business while planting seeds for the next growth cycle—has defined the company's transformation and created the central tension in the investment thesis.

Technology, Products, and Strategic Differentiation

Agora's core technology advantage resides in its SDRTN, a virtual overlay network that intelligently routes traffic across public internet infrastructure to deliver sub-200ms latency globally. This isn't merely a performance feature; it translates directly into customer retention and pricing power by ensuring that live shopping streams don't buffer, education sessions don't drop, and IoT devices respond instantly. The network's adaptation across thousands of device types creates switching costs, as developers who build on Agora's platform face reliability risks if they migrate to competitors' less-optimized infrastructure.

The conversational AI engine, launched in Q4 2024 and upgraded to version 2.0 in Q3 2025, represents a natural extension of this infrastructure. The engine integrates over a decade of audio R&D—AI-powered noise suppression, acoustic echo cancellation, proprietary codecs—to solve interaction challenges that generic AI models cannot address: selective attention to filter background noise, turn-taking algorithms that handle interruptions within 350 milliseconds, and emotion detection for natural conversational flow. This transformation positions Agora from a commodity bandwidth provider into a behavioral intelligence layer, enabling AI agents that are production-ready rather than demo-quality.

The zero-code Conversational AI Studio and open-source TEN framework further differentiate by addressing the "last mile" problem for developers. While Twilio offers robust APIs and Zoom provides SDKs, Agora's approach reduces integration time from months to days, a critical advantage as enterprises race to deploy voice agents. The Conversational AI Device Kit, launched in Q1 2025, extends this into IoT, allowing manufacturers like Robopoet to build companion robots without replicating Agora's audio processing stack. This creates a two-sided network effect: more devices drive platform usage, while more platform capabilities attract device manufacturers.

Financial Performance & Segment Dynamics: Evidence of Strategic Execution

Agora's financial results validate the turnaround thesis. Q3 2025 marked the fourth consecutive quarter of GAAP profitability, with net income of $2.7 million and a 7.8% net margin, a dramatic reversal from the 23% net loss margin in Q2 2024. This wasn't achieved through revenue acceleration alone—though total revenue did grow 12% year-over-year to $35.4 million—but primarily through disciplined expense management. R&D expenses plummeted 52.8% year-over-year to $13.8 million, representing 39.1% of revenue versus 92.7% in Q3 2024, reflecting the full impact of the November 2024 restructuring.

The core RTE business demonstrates genuine stability, not managed decline. Agora brand revenues grew 15.9% year-over-year to $18.2 million, driven by live commerce adoption in North America and Europe where revenue contribution expanded from zero to over 10% globally in under two years. Shengwang revenues grew 8.4% year-over-year to RMB 122.4 million, with management noting recovering demand in China's social entertainment and education sectors alongside rapid IoT growth. Dollar-based net retention rates improved for the fourth consecutive quarter to 108% for Agora and 90% for Shengwang, indicating that existing customers are expanding usage—a hallmark of product-market fit.

Gross margins held steady at 66%, fluctuating between 66-68% for the RTC business, which management expects to continue. This stability proves that cost discipline didn't come from underinvesting in infrastructure; rather, it reflects technical optimization and a focus on higher-value use cases.

The balance sheet provides strategic flexibility with $374.3 million in cash and minimal debt (D/E ratio of 0.13), funding both the AI investment cycle and an active share repurchase program that has retired $132.1 million of stock since February 2022.

Outlook, Management Guidance, and Execution Risk

Management's guidance reveals both confidence and caution. For Q4 2025, Agora expects revenue of $37-38 million, representing 7-10% year-over-year growth, with net income growing sequentially. For full-year 2026, the company targets GAAP operating profit and expects "a big improvement" in net income over 2025. This outlook assumes the core RTE business maintains its growth trajectory while AI revenue begins to materialize—a delicate balancing act that requires continued cost discipline even as AI investments ramp.

This outlook frames 2026 as a potential inflection point, but Tony Zhao's candid admission that building sophisticated agents "will still take a long time" and that success depends on "each individual vertical use cases for their industry know-how" highlights execution risk. The AI engine may be enterprise-grade, but customer product maturity varies widely.

Jingbo Wang's comment that GAAP net profit in 2026 faces "some level of uncertainty due to the potential interest rate cut" adds macro risk to the forecast. Lower interest rates would reduce income from Agora's substantial cash holdings, creating a headwind that could offset operational improvements. This underscores that profitability remains fragile and sensitive to factors beyond management's control, making execution on the AI timeline even more critical.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is the gap between AI demos and production-ready products. Management acknowledges that customers express "frustration with the reliability and scalability of current solutions, especially with distributed users or high concurrent usage." If Agora cannot bridge this gap faster than competitors, the anticipated 2026 AI revenue may prove elusive, leaving the company dependent on its slower-growth core business.

Competitive dynamics pose a multi-front threat. Twilio's scale advantages—$1.3 billion in Q3 revenue versus Agora's $35.4 million—enable lower customer acquisition costs and broader ecosystem lock-in. Cloud giants like AWS (AMZN), Azure (MSFT), and Google Cloud (GOOGL) can bundle RTE capabilities at near-zero marginal cost, potentially commoditizing basic features and compressing industry-wide gross margins by 5-10%. While Agora's latency advantage defends premium pricing today, hyperscale providers could close the performance gap through infrastructure investments that Agora cannot match.

China exposure creates geopolitical vulnerability. With approximately 40% of revenue from APAC, Agora faces regulatory uncertainty and potential disruption from U.S.-China tensions. Jingbo Wang's observation that "only one" major cloud provider remains truly competitive in China suggests the market is consolidating, but also that Agora's success depends on maintaining favorable regulatory access—a risk that larger, more geographically diversified competitors can better absorb.

Scale disadvantages manifest in higher relative operating costs. Agora's smaller revenue base means each new customer represents a larger percentage growth opportunity, but also that customer acquisition costs are proportionally higher than Twilio's or Zoom's . If AI adoption proves slower than expected, Agora may struggle to maintain its recent profitability while funding the R&D necessary to stay competitive, forcing a difficult trade-off between growth investment and margin preservation.

Competitive Context and Positioning

Agora occupies a mid-tier position in the RTE-PaaS market, behind Twilio's dominant scale but ahead of Bandwidth's regional focus. Twilio's 15% year-over-year growth and 90%+ customer retention in key segments reflect a mature ecosystem that Agora cannot replicate quickly. However, Agora's SDRTN delivers materially lower latency in Asia-Pacific markets, where Twilio's U.S.-centric infrastructure suffers performance degradation. This geographic specialization allows Agora to capture share among Chinese companies expanding overseas—a niche that contributed to its 15.9% Agora brand growth versus Twilio's more modest expansion.

Zoom presents a different competitive dynamic. While Zoom's Video SDK offers comparable video quality, its end-user brand focus and higher pricing for advanced features limit appeal to cost-sensitive developers. Agora's developer-first PaaS model and lower bandwidth usage through SDRTN create a 10-15% cost advantage in high-volume applications like live shopping. Yet Zoom's 75% gross margins and $1.5 billion in annual operating cash flow provide resources for AI investment that Agora's smaller scale cannot match, potentially allowing Zoom to close the technology gap.

Bandwidth's regulatory moat in U.S. voice services contrasts with Agora's global video strength. Bandwidth's 911 integration and carrier-grade compliance win enterprise voice contracts that Agora cannot serve, but Bandwidth's limited video capabilities and regional focus make it a partner rather than a direct competitor in most of Agora's growth verticals. The real threat comes from indirect competition: open-source WebRTC and Jitsi offer zero-cost alternatives that appeal to budget-conscious startups, while hyperscale cloud providers bundle RTE tools that could erode Agora's addressable market by 20-30% if adoption accelerates.

Valuation Context

Trading at $3.90 per share, Agora carries a market capitalization of $353.83 million and an enterprise value of $260.18 million, reflecting a net cash position of approximately $93 million. The stock trades at 1.95x enterprise value to trailing twelve-month revenue of $133.26 million, a significant discount to Twilio's 4.08x and Zoom's 3.88x, but roughly in line with Bandwidth's (BAND) 1.12x. This valuation gap suggests the market prices Agora as a low-growth commodity provider rather than a potential AI beneficiary.

On a price-to-sales basis at 2.65x, Agora trades below the typical range for profitable SaaS companies with double-digit growth, which often command 4-6x revenue. The price-to-operating-cash-flow ratio of 15.73x appears reasonable given the recent turn to positive cash generation, though this multiple is based on a single quarter of $0.7 million OCF and could prove volatile. Gross margins of 66.82% are competitive with Zoom's (ZM) 76.89% and superior to Twilio's 49.37%, indicating that Agora's technology commands pricing power despite its smaller scale.

The balance sheet strength—current ratio of 4.34, debt-to-equity of 0.13, and $374 million in cash—provides a valuation floor and funds the AI investment cycle. Management's active share repurchase program, having retired 66% of the authorized $200 million, signals belief that the stock is undervalued at current levels. However, the negative return on assets of -1.19% and operating margin of -4.55% on a trailing twelve-month basis reflect the recent nature of the profitability turnaround, creating uncertainty about whether margins can sustain at the Q3 2025 level of 7.8% net margin.

Conclusion

Agora has engineered a rare dual transformation: achieving sustainable GAAP profitability while positioning for a potential revenue inflection in conversational AI. The core RTE business has proven its resilience, delivering four consecutive profitable quarters and 12% growth with stable 66% gross margins, providing the financial foundation for AI investments. Management's guidance for 2026 GAAP operating profit and "sizable" AI revenue suggests the turnaround is entering a second phase where operational efficiency meets new product leverage.

The investment thesis ultimately depends on execution velocity. If Agora can convert its 150% quarterly AI usage growth into production deployments and capture the "order of magnitude" pricing premium, the stock's 1.95x EV/revenue multiple could re-rate toward Twilio's (TWLO) 4x as the AI revenue stream materializes. Conversely, if the gap between demos and production-ready solutions widens, or if cloud giants bundle competing capabilities, Agora may remain a profitable but slow-growth niche player. Investors should monitor AI customer transitions, net retention trends, and competitive responses as the critical variables that will determine whether this is a temporary turnaround or a genuine inflection point in Agora's trajectory.