Please ensure Javascript is enabled for purposes of website accessibility

This Chinese Tech Stock Could Be the Ultimate Coronavirus Play

By Leo Sun - Mar 24, 2020 at 12:33PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The “Twitch of China” is well insulated from the coronavirus crisis.

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 -2.90%), 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.

A young woman plays a PC game.

Image source: Getty Images.

Understanding Huya's business

Huya was spun off from live streaming giant JOYY (YY -1.12%) in 2018. JOYY and Tencent (TCEHY 1.63%) 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 -4.76%), 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

HUYA Stock Quote
HUYA
HUYA
$4.18 (-2.90%) $0.12
Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
TCEHY
$46.40 (1.63%) $0.74
YY Stock Quote
YY
YY
$30.89 (-1.12%) $0.35
DouYu International Holdings Limited Stock Quote
DouYu International Holdings Limited
DOYU
$1.20 (-4.76%) $0.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
319%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.