Executive Summary / Key Takeaways

• AI-Driven Transformation and Profitability: Tuya Inc. has successfully pivoted into an AI-first strategy since early 2023, achieving significant financial milestones including its first annual GAAP net profit and consistent non-GAAP operating profitability in 2024 and H1 2025, driven by strong operating leverage and declining share-based compensation expenses.
• Robust Platform and Ecosystem Growth: The company's unique AI cloud platform and developer ecosystem continue to expand, with over 1.51 million global developers and 93% of shipped product categories equipped with AI capabilities by mid-2025, fostering rapid innovation and commercialization of AI-powered devices.
• Diversified Revenue Streams and Global Reach: Tuya's balanced revenue structure across IoT PaaS, Smart Solutions, and SaaS, coupled with strategic regional expansion in Europe, Asia Pacific, and North America, provides resilience against macro uncertainties and tariff pressures.
• Technological Moat and Competitive Edge: Tuya's LMM-agnostic and cloud-agnostic AI agent development platform, alongside its open-source frameworks and T5AI developer board, offers unparalleled flexibility and ease of development, distinguishing it from larger, more complex competitor ecosystems.
• Strong Financial Health and Shareholder Returns: With over $1 billion in net cash and consistent positive operating cash flow, Tuya is committed to regular dividend payments, reflecting confidence in its long-term growth potential and dedication to shareholder value.

The AIoT Horizon: Tuya's Strategic Foundation

Tuya Inc., founded in 2014 in Hangzhou, China, has evolved into a global AI cloud platform service provider, positioning itself at the nexus of the Internet of Things (IoT) and artificial intelligence (AI). The company's core mission is to democratize smart technology development, enabling brands, OEMs, system integrators, and independent software vendors to create and deploy AI-powered devices and solutions efficiently. This foundational commitment to an open, developer-centric ecosystem has been a constant through its history, even as it navigated early global trade challenges, including the first tariff ratings in 2018, and later, industry-wide inventory oversupply issues in 2021-2022.

A pivotal strategic shift began in early 2023, when Tuya fully embraced Generative AI (Gen AI) and Large Language Models (LLMs), recognizing their potential to redefine user experiences and accelerate smart device penetration. This foresight has been instrumental in shaping its current market position and strategic responses to a rapidly evolving technological landscape. The broader industry is witnessing a structural transformation driven by AI, with the penetration of IoT and AI still in the low single digits, indicating a vast and promising total addressable market. Tuya's strategy is to enable "first movers" in various vertical fields to become AIoT-ready, providing the tools and platform to capitalize on this immense opportunity.

Technological Differentiation and Innovation: Powering the Smart Future

Tuya's competitive advantage is deeply rooted in its differentiated technology stack, designed to lower the barriers to AIoT development and accelerate commercialization. The company's core offerings include its AI cloud platform, the Tuya AI agent development platform, Tuya Open (an open-source development framework), Hedwig (an edge AI computing environment), and the T5AI developer board.

The Tuya AI agent development platform is a critical differentiator, offering an LLM-agnostic approach that integrates major large language models such as ChatGPT, Huwin, DeepSeq, Doubao, and Amazon Nova. This platform significantly reduces the technical threshold for developers, allowing them to build various AI agent functions, including semantic understanding and image recognition, without starting from scratch. This flexibility is a key benefit, as developers can choose the most suitable AI models based on their specific business and marketing needs. By June 13, 2025, an impressive 93% of Tuya's shipped product categories were equipped with AI capabilities, and the Tuya AI developer platform supported 150 million interactions per day globally across diverse scenarios like AI notes, AI health, and robotics. Developers have collectively created 9,372 AI agents, reflecting the growing penetration of AI into smart devices.

Further enhancing its technological moat, Tuya AI provides a full process chain from high-performance edge AI modeling to smart card deployment, greatly lowering the difficulty and time required for AI hardware development. The Tuya Open open-source framework enables differentiated development and integration into the ecosystem, fostering a collaborative environment. The T5AI developer board is gaining traction, with its adoption being driven by community initiatives like the OTA Robot project, which has already entered commercialization. Tuya's R&D initiatives are focused on continually lowering the AI developer threshold through AI coding tools and scenario-based strategies, and accelerating the commercialization of AI hardware innovations through hackathons and university collaborations. For instance, the mega hackathon "AdventureX 2025" attracted over 800 young developers, generating hundreds of prototypes with commercial potential. This continuous innovation and developer enablement directly contribute to Tuya's competitive moat, driving higher adoption rates and strengthening its market positioning as a comprehensive AIoT enabler.

Competitive Landscape: Agile Challenger in a Giant's Arena

Tuya operates in a competitive landscape dominated by tech giants like Amazon (AMZN) (AWS IoT), Microsoft (MSFT) (Azure IoT), and Google (GOOGL) (Google Cloud IoT), which possess vast cloud infrastructures and extensive enterprise relationships. These larger players offer broad, feature-rich platforms with deep integration capabilities across their respective ecosystems. However, Tuya carves out its niche by emphasizing agility, accessibility, and cost-effectiveness, particularly for smaller-scale IoT deployments and businesses in emerging markets.

Tuya's LLM-agnostic and cloud-agnostic strategies provide unparalleled flexibility, distinguishing it from single-category solutions offered by some competitors. While Amazon and Microsoft excel in enterprise-grade security and scalability, Tuya's platform offers a simpler user experience and a faster time-to-market for IoT applications, making it an attractive option for startups and cost-sensitive customers. For instance, in smart healthcare or education, Tuya's offerings might provide greater flexibility for custom integrations. Google, with its cutting-edge AI capabilities, focuses on data-intensive applications, whereas Tuya's strength lies in its developer-friendly ecosystem and straightforward hardware-agnostic solutions.

Financially, Tuya's growth rates, while robust, may exhibit more volatility compared to the consistent expansion of its larger rivals, who benefit from immense scale and diversified revenue streams. However, Tuya's focus on operational efficiency, as evidenced by a 47% increase in company-wide revenue per employee in 2024 and stable non-GAAP operating expenses, allows it to maintain strong profitability despite its comparatively smaller scale. The company's strategic partnerships, such as with ByteDance's Volcano Engine for Doubao LLM integration and collaborations with major toy industry leaders in China, further enhance its competitive standing by enriching its AI platform and expanding its market reach.

Financial Performance: A Story of Resilient Growth and Profitability

Tuya's recent financial performance underscores its successful strategic transformation and operational discipline. In the first half of 2025, the company generated approximately $155 million in revenues, marking about 15% year-over-year growth. Specifically, Q2 2025 revenue reached $80.1 million, an increase of 9.3% year-over-year, slightly surpassing internal forecasts. This growth was achieved despite intensifying global trade uncertainties and U.S. tariff policies that disrupted the consumer electronics industry.

Profitability has seen a significant turnaround. Tuya maintained a blended gross margin of approximately 48% for both Q2 and the first half of 2025. Notably, the company achieved a 10% non-GAAP operating margin and a 25% non-GAAP net margin in Q2 2025, with non-GAAP operating profit growing approximately 127% year-over-year. This highlights the strong operating leverage embedded in Tuya's business model. The GAAP net margin also expanded over 11 percentage points in Q2 2025, partly due to a decline of over 50% in accounting share-based compensation expenses. For the full year 2024, Tuya achieved nearly 30% year-over-year revenue growth, reaching $298.6 million, and reported its first-ever annual GAAP net profit, alongside a 7.4% non-GAAP operating margin and a 25.2% non-GAAP net profit margin.

Segmental Contributions and Operational Excellence

Tuya's diversified business model, comprising IoT PaaS, Smart Solutions, and SaaS and Others, each contributes uniquely to its financial health:

• IoT PaaS: This segment remains the foundational growth engine. In Q2 2025, PaaS revenue grew 7% year-over-year, leveraging its diversified product ecosystem, particularly in home appliances. Its gross margin reached a historical high of 48.7% in Q2 2025, consistently staying in the 47-48% range. Management is optimistic about continued growth, driven by product innovation, AI-based services, and enterprise-level customer expansion, including significant projects like the Singapore Housing and Development Board (HDB) for centralized energy management.
• Smart Solutions: This segment, offering tailored hardware and software integrated solutions, demonstrated robust growth. Q2 2025 saw revenue growth of 16.7% year-over-year, following over 100% year-over-year growth in Q3 2024 and 47.1% in Q1 2025. Gross margin for Smart Solutions was 22.5% in Q2 2025. While lower than PaaS due to its hardware component, management aims to maintain it above 20-21%. The segment's growth is fueled by high-demand categories like energy-efficient products, smart video, central control, and new AI solutions such as smart bird feeders and AI toys in China.
• SaaS and Others: This segment, focused on recurring value-added software services, delivered $11.1 million in revenue in Q2 2025, up 15.6% year-over-year. Its gross margin stood at a strong 72% in Q2 2025, characteristic of software-based offerings. Growth is driven by identifying scalable verticals like hospitality, energy management, outdoor, and logistics, and converting more end-users to recurring premium features.

Operationally, Tuya has maintained disciplined execution. Non-GAAP net operating expenses have remained stable at around $30 million per quarter for six consecutive quarters since early 2024, despite increased investment in AI and R&D. This cost control, coupled with revenue growth, has significantly improved operating leverage. The company's developer ecosystem continues to flourish, with over 1.51 million global developers by Q2 2025. The dollar-based net expansion rate (DBNER) stood at a healthy 124% in Q3 2024 and 122% in Q4 2024, indicating strong demand from existing customers.

Liquidity and Shareholder Returns

Tuya maintains a robust financial position, with a net cash balance of just over $1 billion at the end of Q2 2025. The company generated strong operating cash flow of over $18 million in Q2 2025 and $80.4 million for the full year 2024, marking seven consecutive quarters of positive operating cash flow since Q2 2023. This strong liquidity supports its growth initiatives and commitment to shareholder returns.

The Board has approved regular cash dividends, including a $37 million dividend paid in Q2 2025 and another totaling $33 million. This regular dividend policy, based on stable non-GAAP profitability, reflects management's enduring confidence in the company's long-term growth potential and its dedication to returning value to shareholders. Furthermore, the recent investment by 65 Equity Partners, an investment platform of Temasek, to purchase approximately 13% of Tuya's shares, underscores external confidence in its vision and international expansion strategy, particularly in the rapidly growing Asia Pacific region.

Outlook and Risks

Looking ahead, Tuya anticipates continued pressure in Q3 2025 from global trade uncertainties and U.S. tariff policies, which have led to conservative behavior among retailers and manufacturers. However, management expects conditions to improve in Q4 2025, assuming eventual resolution of tariff negotiations. The company's strategic focus remains on deepening customer relationships, seizing regional opportunities (e.g., AI-driven energy saving in Europe, smart residential solutions in Asia Pacific, pet/entertainment in North America, e-commerce in China), and accelerating AI innovation among developers.

Management projects PaaS gross margins to remain around 45% or slightly over, SaaS gross margins above 70%, and Smart Solutions gross margins above 20-21%. While the overall gross margin might slightly decrease in the long term as the lower-margin Smart Solutions segment grows, this is viewed as a healthy trend given the strong profitability of each segment and the company's ability to maintain operating leverage. The substantial decline in share-based compensation expenses is expected to continue into 2025, further boosting accounting profitability. Tuya's internal use of AI across departments, from marketing to R&D, is also expected to enhance operational efficiency and profitability.

Key risks include the ongoing geopolitical and trade tensions, which can cause demand volatility and supply chain disruptions. While Tuya is indirectly impacted, its diversified ecosystem and ability to follow customer supply chain relocations provide structural resilience. Currency fluctuations also pose a risk, though currently managed. The commercialization of AI capabilities on devices is a gradual process, and while Tuya is at the forefront, widespread adoption and monetization will take time.

Conclusion

Tuya Inc. stands as a compelling investment thesis, driven by its strategic pivot to AIoT and a robust platform model that fosters innovation and commercialization of smart devices globally. The company's history of adapting to market challenges has culminated in a period of sustained profitability and strong financial health, evidenced by consistent revenue growth, expanding margins, and substantial cash reserves. Its technological leadership, particularly in its LLM-agnostic AI agent development platform and open-source ecosystem, provides a significant competitive moat, enabling developers to easily build and deploy next-generation AI-powered hardware.

Despite ongoing macro uncertainties and tariff pressures, Tuya's diversified business segments, disciplined operational execution, and strategic regional focus position it for continued expansion. The commitment to shareholder returns through regular dividends further underscores management's confidence in its long-term growth trajectory. As the world moves towards an increasingly interconnected and intelligent future, Tuya's role as a foundational AIoT enabler, with its unique blend of platform power and technological agility, makes it a noteworthy player in the evolving smart device landscape.