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Why DouYu Stock Popped This Morning

By Jon Quast – Updated May 26, 2020 at 11:41AM

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The company, based in Wuhan, China, beat expectations for the first quarter, but there's a metric investors are overlooking.

What happened

Shares of Chinese video game live-streaming company DouYu International Holdings (DOYU -4.26%) blasted off early on Tuesday morning, after the company announced earnings for the first quarter of 2020. As of 11:15 a.m. EDT today, the stock was trading 16% higher. 

DouYu beat Wall Street's expectations on both the top and bottom lines, providing fuel for today's rally. But the stock is still down year to date and over the past year.

DOYU Chart

DOYU data by YCharts.

So what

DouYu's quarterly revenue surged 53% year over year to $321 million, largely due to improved monetization options on the company's live-streaming platform. This provided a direct benefit to net earnings, with the company reporting a $36 million profit. This translated to a net profit margin of 11.2%, compared with just a 1.2% margin last year.

Keep in mind that Q1 ran from Jan. 1 to March 31. Expectations for this time period may have been extraordinarily low, since DouYu is headquartered in Wuhan, China, which experienced the earliest outbreak of COVID-19 and was locked down for some time. Even though DouYu's business is a digital platform, its employees in Wuhan were forced to work from home for much of the quarter. This could have caused operational hiccups. 

A dollar bill is folded into an arrow pointing up.

Image source: Getty Images.

Now what

DouYu's poor stock performance over the past year is partly due to slow user growth. And on that front, growth looked anemic again in Q1. Monthly average users actually declined for the quarter. Paying users increased 26% year over year, which looks OK on the surface, but was only a 4% gain from the previous quarter, during a time when potential new users were sheltering at home.

While DouYu beat revenue and profit expectations, long-term investors shouldn't ignore user metrics, since they provide the bulk of this company's revenue. If there was ever a quarter to demonstrate strong user growth, it was this one. Given the weak growth, it looks like today's rally for this video game stock is overdone. 

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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