What happened

From its late-September IPO debut to Nov. 9, shares of Arabic social networking company Yalla Group Limited (NYSE:YALA) climbed 54%, as investors bet big that Yalla's first-ever earnings report as a public company would be a blowout. That's not how things played out, however, when the earnings news finally arrived, and Yalla reported its big net loss.

From earnings day on Nov. 9 to last Monday, shares of the company lost 25% of their value. Its stock price resumed climbing again last week, however, and on Monday that upwards trend gained greater strength, with Yalla stock up another 4.8% in 1:15 p.m. EST trading.

Arrow angles up on a green stock chart

Image source: Getty Images.

So what

Good news for investors? Perhaps.

But here's the thing: There's actually no news on the wires right now that would seem to explain investors' change of heart about this recent IPO.

Instead, news reports about Yalla are full of press releases from "investor rights" law firms suing Yalla for allegedly misleading investors about the effect issuing stock options would have upon its profitability in the third quarter of 2020. Such shareholder lawsuits are generally not considered to be good news for a stock, as they tend to drown out more positive news, and depress enthusiasm for the stock.  

Now what

So why did Yalla shares do so well last week, despite the bad litigation news, and why are they continuing to do well today? Perhaps because investors are looking past the lawsuits, and focusing on the company's performance.

Remember: This month, Yalla reported that it nearly doubled its sales in Q3, quadrupled its audience, and grew the number of users paying for its service ten-fold. Sales growth in Q4 is expected to be nearly as strong as seen in Q3 -- up 87% year over year.

Yalla may not have earned any money last quarter, but if sales keep growing the way they have been doing, it's a good bet that Yalla will announce earning something this quarter -- and investors seem to be positioning themselves to profit when it does.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.