The novel coronavirus (COVID-19) pandemic is sparking indiscriminate selling across multiple sectors worldwide, but many babies are being tossed out with the bathwater. Huya (HUYA 2.78%), which owns the top video game streaming platform in China, is one of those babies.
Huya recently posted fourth-quarter earnings that easily beat analysts' expectations, and offered rosy guidance for the first quarter. Yet the stock barely budged, and remains just slightly above its IPO price of $12 per share. Let's dig deeper to see why Huya's stock offers investors a great way to weather the coronavirus crisis.
Image source: Getty Images.
Understanding Huya's business
Huya was spun off from live streaming giant JOYY (YY 1.15%) in 2018. JOYY and Tencent (TCEHY 1.37%) are currently the company's top investors.
Huya Live's monthly active users (MAUs) grew 29% annually to 150.2 million last quarter. Its mobile MAUs rose 22% to 61.6 million, and its total number of paid users -- those who purchase channel subscriptions and virtual gifts for broadcasters -- rose 6% to 5.1 million.
Huya's main competitor is DouYu (DOYU 3.48%), another Tencent-backed video platform which grew its MAUs 8% annually to 165.8 million last quarter. DouYu serves a larger audience than Huya, but it doesn't exclusively stream esports content. In terms of esports content, Huya remains the larger platform.
Huya generated 95% of its revenue from its live streaming platform last quarter. The remaining 5% mainly came from ads. Huya's revenue growth has decelerated over the past year, but its growth rate remains impressive for a stock that trades at less than three times its trailing revenue:
|
Period |
Q4 2018 |
Q1 2019 |
Q2 2019 |
Q3 2019 |
Q4 2019 |
|---|---|---|---|---|---|
|
Revenue growth (YOY) |
103% |
93% |
94% |
77% |
64% |
YOY = Year-over-year. Source: Huya quarterly reports.
Huya's main expenses include revenue-sharing agreements with broadcasters, content licensing costs, and operating expenses incurred from hosting streaming videos. Those expenses prevented it from achieving profitability at the time of its IPO, but it's now consistently profitable by both GAAP and non-GAAP metrics.
Huya's GAAP net income rose 60% annually last quarter. On a non-GAAP basis, its net income grew 45%. It attributed that growth to higher gross and operating margins, which expanded sequentially and annually during the fourth quarter:
|
Non-GAAP |
Q4 2018 |
Q3 2019 |
Q4 2019 |
|---|---|---|---|
|
Gross margin |
16.1% |
18.3% |
19.5% |
|
Operating margin |
5.5% |
6.5% |
7.4% |
Source: Huya quarterly reports.
A coronavirus-resistant play
Huya's fourth quarter ended on Dec. 31, before China implemented aggressive lockdown and quarantine measures to contain the coronavirus. Many industries ground to a halt, but the usage of live streaming services remained robust.
As a result, Huya expects its revenue to rise 45%-47% annually during the first quarter, even after factoring in the full impact of the coronavirus outbreak. It stated that lockdowns and the winter vacation boosted engagement rates on its streaming platform.
Wall Street currently expects Huya's revenue and earnings to rise 35% and 59%, respectively, this year -- which are jaw-dropping growth rates for a stock that trades at just 15 times forward earnings.
Several tailwinds should lift Huya higher over the next few quarters. The gaming and live streaming markets should remain strong as people spend more time at home, while the spending power of viewers and advertisers should rise as the Chinese economy restarts. Huya's gradual expansion into overseas markets could also accelerate as social distancing efforts in other countries push viewers toward live streaming platforms.
But don't get too greedy (yet)
Huya's business is well-insulated from the coronavirus pandemic and its stock looks cheap relative to its growth. Investors can consider nibbling on Huya at these levels, but they should realize that the stock could still be pulled lower with the broader markets.
