ANALYSIS: YY Stock Wilts While Affiliates Add Potential Growth Opportunities

Chinese video-streaming firm YY may end up being more valuable for its investment acumen in Huya and BIGO than for its core business.

Donovan Jones
    Feb 15, 2019 4:30 AM  PT
ANALYSIS: YY Stock Wilts While Affiliates Add Potential Growth Opportunities
author: Donovan Jones   

Quick Take

Chinese online video has been a booming business in recent years.

Video-streaming firms YY Inc. (Nasdaq: YY) and its affiliates Huya Inc. (NYSE: HUYA) and BIGO have grown markedly to serve the insatiable appetites of consumers for fresh video-based content.

However, YY's stock price has experienced a 45 percent drop in value over the past 12-month period due to flattening revenue trajectory, intense competition in some of its product segments, and uneven earnings per share.

Company & Affiliates

Guangzhou-based YY was founded in 2005 to provide live, streaming entertainment and social interactions to Chinese consumers. The firm went public in the U.S. via an IPO in late 2012.

YY's primary business model is to provide most of the service for free, but charge for users to send digital goods to each other and to live streamers in the form of payment.

YY has a majority interest in Huya Broadcasting along with major internet provider Tencent Holdings Ltd. (HKEX: 0700). Huya also provides live-streaming services via a similar business model as YY and went public in the U.S. in June 2018, raising $180 million.

Huya has a current market capitalization of approximately $4 billion at press time. However, Tencent has an option to acquire a majority interest in Huya, effectively taking control if it so desires. Some analysts believe it will exercise that option as part of its push into esports content providers.

YY also has a significant investment interest in BIGO, the largest investment of which it made in June 2018 and which gave it the option to acquire control of the company after June 2019.

BIGO provides a variety of live-streaming services using the same business model of charging for digital goods for users located in India and other Southeast Asian and Middle East countries. The firm is looking to expand into English-speaking countries, such as Australia and the U.S., as well as Japan.

While there is some wiggle room for category definition, the overall growth in demand for online media in China is impressive.

According to a market research report by PwC on the China Media Outlook, it forecasts an average CAGR of 8.1 percent for the categories of Total TV and Video Revenue and Video Games for the period 2015 - 2020.

The global entertainment media growth rate is forecasted to be a CAGR of 4.4 percent vs. China's overall CAGR of 8.8 percent, or double the global rate.

Recent Performance

Topline revenue growth over the most recent five quarters for YY has been both uneven and attenuated, as the chart below shows.

(Source: Seeking Alpha)

Over the past year, while the firm has beaten expected earnings and revenue targets, YY stock has largely performed negatively in response to its quarterly financial reports, with percentage drops of 10 percent or greater shown as the taller red areas in the chart below.

(Source: Sentieo)

The firm's gaming-related revenue has flattened due to intense competition in that sector. In fact, China's online video markets have been experiencing intensified competition, especially as a result of the largest Internet firms such as Tencent and Alibaba Group Holding Ltd. (NYSE: BABA) vying for dominance in a highly prized market space.

YY's incumbent, legacy position may be under threat by these much larger firms, perhaps necessitating management's geographical diversification away from China and into other regions such as through its investment in BIGO.

However, analysts haven't wasted time in downgrading its future potential. In November 2018, JP Morgan dropped its rating on the stock from Overweight to Neutral, and its price target from $85 to $70. Shares in the YY closed at $68.87 yesterday in New York.

While YY has the legal option to acquire BIGO, it may not be financially able to complete a transaction, so the primary option for the BIGO asset may be to IPO, which would likely be a longer process if it seeks to IPO on U.S. markets. This could delay its expansion plans and future value increase, affecting YY's valuation accordingly.

YY has also shown highly variable earnings in 2018, which has likely contributed to the market's apparent reevaluation of its future prospects, with negative earnings in Q2 2018 being the most visible example of the firm's troubles as shown below,

(Source: Seeking Alpha)

YY's fate may be to turn into the "Yahoo" of China: an early entrant with promising prospects in a cutting edge area of the Internet only to be overtaken in its core business by the next generation of more efficient companies at greater scale.

Just as Yahoo ultimately provided value through its early and ultimately highly valuable investment stake in Alibaba, YY may end up being more known for its investment acumen in Huya and BIGO and less for its core business offering.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)