Chinese regulators recently banned Amazon's (NASDAQ:AMZN) Twitch, the most popular video game streaming platform in the world, for unclear reasons. The ban is likely part of the government's wider crackdown on live streaming video and video games, which are both high-growth businesses in the People's Republic.
Twitch has over 140 million unique monthly viewers, more than 15 million daily active viewers, and 2.2 million content creators. Amazon acquired the company in 2014 as part of the tech giant's expansion into video games and streaming video. Amazon's e-commerce presence in China is tiny, so it was likely using Twitch to maintain a foothold in the country -- which surpassed the U.S. as the world's top video game market last year.
It's unclear how many of Twitch's viewers are from China. However, Twitch briefly became the third most popular free iOS app in China during its recent coverage of the esports championship during the Asian Games in Jakarta, which weren't broadcast on the country's television networks or domestic game streaming platforms.
Therefore, the ban on Twitch sounds like good news for Huya (NYSE:HUYA), China's second largest (and biggest publicly traded) video game streaming platform. YY (NASDAQ:YY) spun off Huya in an IPO earlier this year, and its stock has since more than doubled from its initial price of $12. But investors should tread carefully -- will the Twitch ban send more users to Huya, or is Huya also on the Chinese government's hit list?
Getting to know the "Chinese Twitch"
Huya's average monthly active users (MAUs) rose 11% annually to 91.5 million last quarter. Within that total, its average mobile MAUs rose 25% to 42.7 million. Paying users, who buy virtual gifts for their favorite broadcasters to unlock special features, rose 41% to 3.4 million.
Huya generates most of its revenues from those paid users, while a much smaller percentage comes from its display ads and other smaller businesses. Last quarter its live streaming revenues rose 125% annually to 991.8 million RMB ($149.9 million), while its advertising and other revenues climbed 138% to 46.5 million RMB ($7 million).
Huya's total revenues more than doubled to 1.04 billion RMB ($156.9 million), and it expects its growth rate to remain above 100% during the third quarter. On the bottom line, it booked a non-GAAP net profit of 105.4 million RMB ($15.9 million), compared to a loss of 9.3 million RMB in the prior year quarter. Its net cash from operations also rose 32% annually to 105.6 million RMB ($16 million).
YY is still Huya's largest shareholder, followed by Tencent (OTC:TCEHY), the largest video game publisher in the world. Tencent acquired a 34.6% stake in Huya in March, and has the option to buy up to 50.1% of the company between March 8, 2020 and March 8, 2021. Tencent is currently integrating many of its top games into Huya's streaming platform.
Huya's biggest competitor in China isn't Twitch -- it's Douyu TV, a bigger Tencent-backed platform that hit 200 million MAUs and 30 million DAUs last year. Huya also faces competition from another start-up, Panda TV, along with Gen Z-focused video streaming platforms like Bilibili and ByteDance's Jinri Toutiao, which is reportedly developing a game streaming platform.
What's bad for Twitch... might not be great for Huya
Twitch's temporary growth spurt in China mainly happened because viewers couldn't watch the esports competition from the Asian Games on other platforms. That caused many viewers to not only flock to Twitch, but to also use VPNs to bypass China's great firewall and watch the games on overseas websites like YouTube.
Those actions defied the Chinese government's efforts to curb gaming addiction (or reduce teenage myopia, according to another statement) by temporarily suspending the approval of new video games. That's why it wasn't surprising that the government, which was already wary of foreign websites like YouTube, banned Twitch.
That move could also be interpreted as a stern warning for Huya, which already saw its monthly active broadcaster count dented by the government's new real-name registration requirements last year. In other words, it's skating on thin ice.
Meanwhile, the elimination of Twitch won't help Huya as much as the elimination of Douyu or its other domestic rivals would. Twitch's abrupt growth spurt in China was an anomaly rather than the start of a bigger shift toward overseas streaming services. Therefore, investors could consider buying Huya because it's a great growth stock -- but not because Twitch got banned.