Huya (NYSE:HUYA) -- a leading game-centric live streaming platform in China backed by Tencent Holdings Ltd (SEHK: 0700) -- saw its share price decline by 43% from its 12-month high, despite delivering solid 80% revenue growth fiscal 2019. While the COVID-19 outbreak, as well as the general negative sentiment toward Chinese companies, might have caused the fall in its share price, I think Huya is still poised to shine over the long term.
Huya is the kind of stock growth investors love. Founded in 2014 as a business unit within JOYY (NASDAQ:YY), Huya has since grown into a leading game-centric live streaming business in China with 150.2 million average monthly active users (MAUs). In the last three years alone, revenue has grown more than tenfold to $1.1 billion in 2019, making it the largest game-centric live streaming company in terms of revenue. Moreover, it reported its first-ever annual GAAP net profit of $67 million for fiscal 2019 thanks to its expanding margins.
These numbers indicate that Huya is capable of both growing at high rates and delivering a net profit, with the latter signaling that the streaming platform might have reached its critical mass. Furthermore, as Huya continues to grow its business, it should be able to leverage its economies of scale to further improve its margin. In other words, I expect it to grow net profit faster than revenue in the future.
E-sports is one of the fastest-growing entertainment markets in China. According to market research firm Frost & Sullivan, China's e-sports market has the largest gamer base in the world, with approximately 229 million gamers in 2017, and could reach 537 million gamers by 2022. This would benefit the game-centric live streaming market in China, which is projected to grow from $1.2 billion in 2017 to $4.9 billion in 2022 at a compound annual growth rate (CAGR) of 34%.
As the leading player in the game-centric live streaming market (with an estimated 30%-40% market share by revenue), Huya is well-positioned to benefit from the above tailwinds. Through its cooperation with e-sports tournaments, event organizers, and major game developers and publishers, Huya secures a reliable supply of high-quality e-sports content for its platform, which would allow it to delight its existing users and also to attract new users.
In addition to its game and e-sports content, Huya has expanded its offerings to cover non-game entertainment content, such as talent shows, anime, outdoor activities, live chats, and more. By diversifying its content genres, Huya can now appeal to a wider customer base and also enhance the stickiness of its platform. Moreover, it has expanded its operations to overseas markets since 2018 through Nimo TV -- a game-centric live streaming platform operating primarily in Southeast Asia and Latin America. This further opens up new markets for future growth.
There are, however, risks to consider as well. For example, Huya faces competition from other live-streaming competitors such as DouYu International Holdings Ltd (NASDAQ:DOYU), JOYY (NASDAQ:YY), and Momo Inc (NASDAQ:MOMO) that might impact its future expansion. So far, Huya has proven that it has the upper hand in the game-centric live streaming market, and is doing what it can (such as diversifying its content) to maintain its leading position. Besides, its foray into overseas markets is still in the early days, and there is no guarantee that this business would become profitable in the future.
Ample financial resources
To sustain its high growth rate, Huya must continue to invest huge sums in content and marketing costs for the foreseeable future. Fortunately, it has abundant financial resources to do so.
As of Dec. 31, 2019, Huya had zero debt and $1.4 billion in cash and cash equivalents, short term deposits and short-term investments, up by 68% as compared to the previous year. It also generated operating cash flow of $279 million for the fiscal year 2019, up by 171% (in constant currency) as compared to fiscal 2018. This is laudable considering that Huya's operating expenses (including marketing costs) jumped 75% over the same period!
With its strong balance sheet and cash-generating operations, Huya has the necessary firepower to invest in and grow its business over the next few years.
Despite falling by 43% from its recent peak, Huya's stock is still trading at an elevated valuation of more than 50 times earnings. Nevertheless, I think its current valuation is fair given its strong growth prospects and huge cash hoard (excluding the cash, Huya is trading at about 31 times earnings).
All things considered, interested investors could consider initiating a small position in Huya's stock now, and further increase that position if 1) the stock becomes cheaper or 2) Huya delivers better than expected performance.