JOYY (YY +2.40%) runs leading live video streaming platforms in China and overseas. It also owns a majority stake in Huya (HUYA 4.78%), a top video game streaming platform in China. In the last 12 months, JOYY's stock price has fallen by 38% amid declining earnings. But despite the swoon in its share price, we've found three reasons why investors should still like the company.
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1. A profitable China business
JOYY, through YY, owns one of the largest live video streaming platforms in China, YY Live, with 39.9 million mobile monthly active users (MAUs). On its platform, viewers can access a variety of content performed by hosts (such as music and dance shows, talk shows, sports, games, and more) for free. In return, YY gets revenue by letting viewers purchase virtual gifts to reward their favorite hosts.
YY drives the bulk of JOYY's profitability. In the third quarter of 2019, it generated operating income of $94 million when the rest of the company generated a loss of about $72 million. With its leading position in the Chinese live-streaming industry -- it's No.1 across various metrics like MAUs, average daily time spent, and paying users -- YY is well-positioned to leverage its scale and AI-enhanced data to improve the choice and relevance of its content offerings for customers. The result would be better customer engagement, stickier customer relationships, and sustainable profitability.
Still, YY faces competition from the likes of Momo Inc (MOMO 3.71%), Tencent Music Entertainment Group-ADR (TME 3.19%), Kuaishou, Douyin and other live streaming platforms in China. Hence, any major deterioration in performance metrics (such as profitability or operational stats) would raise a red flag.
2. Hello, Huya
Complementing the profitable YY business is JOYY's majority stake (43.9% in shares, 54.8% in voting rights) in its fast-growing subsidiary Huya. Known as the "Twitch of China," Huya is a leading player in China's online game streaming industry, with 146.1 million MAUs as of September 30, 2019. Similar to YY, HUYA generates 95% of its revenue from selling virtual gifts on its livestreaming platform.
In its most recent quarter, Huya reported that revenue grew 77% to $317 million. Net income more than doubled to $17 million, thanks to growth in its number of paying users (up 28.5% to 5.3 million) and average spending per user. Going forward, Huya has huge room to grow its revenue, since less than 4% of its 146.1 million MAUs are paying users. As more of its customers convert into paying users, investors can expect Huya's revenue to grow over time.
3. Big opportunities for Bigo
JOYY entered the overseas market in a major way after acquiring the remaining 68.3% of Singapore-based Bigo's shares in March 2019. Bigo provides live video-streaming services through its BIGO LIVE platform, and short video services through its LIKEE platform, to customers outside of China.
In many ways, the acquisition of Bigo opened up significant growth opportunities for JOYY. For example, JOYY's overseas operations currently contribute about 22% of its revenue, despite providing about 80% of its global mobile MAUs. Also, its fast-growing short video platform LIKEE (with 100.2 million mobile MAUs) is still in a very early stage of its development with little revenue. As these platforms achieve critical mass, JOYY can then start monetizing them to grow its revenue.
However, investors should note several risks. First, Bigo is currently operating at a loss and is likely to remain so for the foreseeable future as the company ramps up its overseas investments. Second, JOYY will face significant competition as it grows its overseas business. For example, its short video platform, LIKEE, will have a daunting task of competing against the incumbent Tiktok as it expands its reach globally.
On balance, I think management's decision to grow its overseas business is positive, because it opens up new possibilities to create value for shareholders.
Long term investing
JOYY's stock has been beaten down lately, mainly because of the drop in groupwide earnings in the third quarter of 2019, down by 83% to $15 million. This owed primarily to the consolidation of BIGO's loss-making business (negative $68 million). On the bright side, groupwide revenue grew by 68% to $963 million for the same period.
Going forward, investors should expect the company's profitability to remain under pressure as it continues to invest in itself and grow its overseas business. In other words, the share price might not recover in the short term. But for those who are willing to invest with an eye toward the next three to five years, JOYY looks like a good candidate to study further.
