YY (NASDAQ:YY), one of China's top live video companies, lost nearly 30% of its value over the past 12 months amid the broader sell-off in Chinese equities. Concerns about YY's contracting margins, mainly caused by its takeover of Singapore-based Bigo, exacerbated its decline.

However, YY's core business isn't dependent on ads, which insulates it from the slowdown in the Chinese economy that hurt companies like Baidu. Its acquisition of Bigo also gives it a presence beyond China, which mitigates the impact of the trade war. Let's take a closer look at YY to see if it's a worthy buy.

A young beauty blogger broadcasts a live video on her smartphone.

Image source: Getty Images.

How does YY make money?

YY generated 94% of its revenue from its live streaming video unit last quarter. That unit includes YY Live, its core live video platform for mostly user-created entertainment, music, sports, and e-learning videos; a majority stake in Huya (NYSE:HUYA), the video game streaming site that went public last year; and Bigo, which owns the Bigo Live streaming app, LIKE short video app, and IMO video chat app.

YY Live and Huya mainly operate in China. Bigo serves users in other Asian markets, the Middle East, and America. The inclusion of Bigo's users expands YY's live video ecosystem to 400 million monthly active users (MAUs) worldwide, and only about a quarter of those users are in China. YY monetizes all these live videos by letting viewers buy virtual gifts for their favorite broadcasters.

The rest of YY's revenue comes from its "other" businesses, which include ad revenue from Huya, Bigo, and Hago, its smaller social network for casual mobile games. Here's how YY's two core businesses fared over the past year:

YOY revenue growth

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019

Live streaming

47%

50%

36%

30%

48%

Others

4%

(9%)

(7%)

(3%)

36%

Total

43%

45%

33%

28%

47%

YOY = year-over-year, RMB terms. Source: YY quarterly reports.

YY's top-line growth looks impressive, but its first-quarter numbers included almost a month of sales from Bigo, which it formally acquired on March 4. YY expects its second-quarter revenue to rise 59%-64% annually (in RMB terms), and analysts expect 51% growth (in USD terms) for the full year.

Each of YY's brands continues to gain users. YY's average mobile MAUs surged 66% annually to 59.9 million last quarter thanks to the growth of Hago. Huya's average mobile MAUs rose 30% to 53.9 million, and that growth could accelerate as it expands overseas. Bigo's mobile MAUs surged 161% to 78.7 million, as its mobile IMO MAUs reached 211.8 million.

Dollar signs rising out of a smartphone.

Image source: Getty Images.

Did YY bite off more than it can chew?

YY is still growing quickly, but its margins are being squeezed from all sides. Bigo is still unprofitable, so YY needs to offset those losses with the growth of its other businesses. Unfortunately, a higher percentage of YY's revenue growth comes from Huya, which generates lower-margin revenue than YY Live.

Meanwhile, YY's sales and marketing expenses are climbing as its ecosystem expands, it's splitting a higher percentage of revenue with its top broadcasters, and it's spending more cash on content. As a result, YY's operating margin fell from 18.4% to 9.9% between the first quarters of 2018 and 2019.

YY also didn't offer any margins or earnings guidance, which keeps investors in the dark regarding its ability to monetize Bigo's massive base of unprofitable users. That's why analysts expect YY's adjusted earnings to tumble 31% this year.

Wall Street expects these headwinds to fade next year, and for YY's revenue and earnings to rise 23% and 32%, respectively. They also expect YY's earnings to grow an average of 24% annually over the next five years -- which is a robust growth rate for a stock that trades at less than 11 times forward earnings.

A risky but lucrative investment

That long-term outlook makes YY look cheap, but investors should always take long-term forecasts -- especially for high-growth tech stocks -- with a grain of salt.

We won't know if YY is successfully integrating and monetizing Bigo for a few quarters, and unpredictable headwinds -- like government crackdowns on social networks and live streaming platforms in China -- could abruptly derail those plans. These challenges make YY a fairly speculative investment right now, but it could have plenty of room to run if its expansion plans pan out.