Preview of US stocks | Outstanding performance cannot hide flaws, can Data Cloud Ridge (DCR.US) with research and development accounting for only 3.8% break through from intense competition?

The movie "Nezha 2" has already reached the top of the global animated film box office charts and is now sprinting towards the top five global box office rankings. The success of "Nezha 2" not only showcases the technological strength of the Chinese animation industry to the world, especially in areas such as special effects production and 3D modeling, but also reflects the continuous improvement in the professionalization and standardization of the entire animation production process in China. The strong industrial strength of the Chinese animation industry is inseparable from the continuous efforts of companies within the industry, including DCR Cloud Library, which has begun the journey to be listed on the US stock market. It was reported that the visual effects service provider DCR Cloud Library officially submitted its initial public offering (IPO) application to the SEC on February 21. According to the prospectus, DCR Cloud Library is applying to list on NASDAQ under the code "DCR" and plans to issue 2 million shares of common Class A stock at a price of $4 to $6 in the IPO, aiming to raise up to $12 million. In terms of performance, DCR Cloud Library has achieved high growth. In the 2024 fiscal year (ending June 30), DCR Cloud Library's revenue was $15.8634 million, an increase of 186.7% year-on-year, and the net profit for the period was $1.1931 million, an increase of 199%. Will the impressive performance of DCR Cloud Library be able to capitalize on the global heatwave of "Nezha 2" and achieve a high valuation on NASDAQ? A closer look at the company's prospectus will reveal the answer. Strong market demand driving revenue growth, service to 17 clients in the 2024 fiscal year DCR Cloud Library has not been operating for a long time, having been established less than 4 years ago in 2021. However, the company has been continuously focusing on visual effects production services, and its services now cover the entire visual content production process, from storyboarding to final production. In addition to traditional visual content production, DCR Cloud Library has expanded into the field of virtual reality content to meet the growing demand for immersive experiences. As of now, the visual effects production services provided by DCR Cloud Library have covered multiple areas including film and television, OTT video, games, animation, digital cultural tourism, advertising, and extended reality (XR). To deliver visually stunning and technologically advanced content, DCR Cloud Library has independently developed the production management ecosystem DCR Hub, as well as a series of proprietary tools, software, and plugins to enhance production capabilities and workflow management. Furthermore, in order to optimize the production process and improve overall project efficiency, DCR Cloud Library strategically outsources some work to third-party visual effects producers. This integrated approach ensures seamless execution of projects and meets clients' stringent requirements. Since its establishment in 2021, DCR Cloud Library has served approximately 30 clients, including producers, production managers, and visual effects producers from various fields. These clients come from well-known enterprises in various fields, such as Nova Film and Xixi Pictures. DCR Cloud Library has completed multiple projects for these two clients. In the 2024 fiscal year, DCR Cloud Library achieved revenue growth of 186.7% to $15.8634 million and net profit growth of 199% to $1.1931 million, primarily due to increased market demand. DCR Cloud Library stated that in the 2023 and 2024 fiscal years, the company served 16 and 17 clients, respectively. While the number of clients did not increase significantly, the improvement in performance was attributed to the strengthening of the company's existing client relationships, with a large portion of business generated through referrals from existing clients. This indicates that DCR Cloud Library's professionalism has been recognized by the market, and therefore the company has secured more projects from existing clients, leading to an increase in referrals from new clients. In terms of profitability, DCR Cloud Library's gross profit margins for the 2023 and 2024 fiscal years were 14.7% and 16.2%, respectively, with corresponding net profit margins of 7.2% and 7.5%. The profitability remains stable, without resorting to low-price expansion, which indirectly validates the high-quality rapid growth of DCR Cloud Library. Industrial opportunities and market challenges coexist, with R&D accounting for only 3.8% The high growth of DCR Cloud Library is directly related to the continuing strong demand in various downstream segments, and the company's future development will continue to benefit from this. According to an EMR report, the global VFX (visual effects) market was about $35.59 billion in 2023, and is expected to grow at a compound annual growth rate (CAGR) of 12.9% from 2024 to 2032. By 2032, the global market size is expected to reach $106.04 billion, surpassing the $100 billion mark. As an important part of the global VFX market, the Chinese VFX market is also expected to achieve sustained growth driven by various segments. According to a report by PwC China, the scale of the Chinese OTT streaming video market is expected to grow at a compound annual growth rate of 7.41% from 2022 to 2027, with total box office revenue in China projected to increase from $4.54 billion in 2022 to $13.2 billion in 2027, with a CAGR of 23.77%. Additionally, internet advertising in China reached $94.75 billion in 2022, and is expected to grow at a CAGR of 9% from 2022 to 2027. The continuous growth in various segments will inject new vitality into the development of the VFX market in China. However, while benefiting from industry development opportunities, DCR Cloud Library also faces challenges. The visual content creation and visual effects industries in China are highly competitive, with top companies holding dominant positions in market share and technological levels, often participating in the production of well-known films domestically and internationally with high visibility and market influence. Small and medium-sized enterprises face significant competitive pressure and must find survival space through flexible operations and deep cultivation of niche markets, with international peers from regions such as Hollywood actively expanding into the Chinese market, further intensifying competition. In order to continue to succeed in the technology-driven highly competitive market, DCR Cloud Library must address these challenges.Long, therefore increasing research and development investment in line with the latest technological trends is essential. However, the proportion of research and development expenditure in the income of the Numintelligence Cloud Library during the 2023 and 2024 fiscal years is only 2.9% and 3.8%, respectively, which is relatively low. This is not conducive to the long-term development of the company's core competitiveness.In addition, the concentration of customers in NumberSense Cloud Library is relatively high. In the 2023 fiscal year, three customers of NumberSense Cloud Library accounted for 27%, 15%, and 11% of the total company revenue respectively, totaling as high as 53%. By the 2024 fiscal year, five customers of NumberSense Cloud Library accounted for 22%, 13%, 11%, and 11% of the total company revenue respectively, totaling as high as 57%. Although the customer concentration in the 2024 fiscal year has decreased compared to the 2023 fiscal year, it still remains at a relatively high level. If demand from the top customers weakens or they are lost in the future, it may have an impact on the business operations of NumberSense Cloud Library. Overall, NumberSense Cloud Library has achieved high growth in performance based on strong market demand, and it will continue to benefit from the development of the visual effects industry in the future. However, NumberSense Cloud Library also faces the challenge of increasing market competition, as well as the urgent need to address issues such as low research and development investment and high customer concentration. From the perspective of the capital market, NumberSense Cloud Library's impressive performance and small market capitalization may attract speculative investment during its IPO.