Please ensure Javascript is enabled for purposes of website accessibility

Why Yalla Stock Just Popped

By Rich Smith - May 21, 2021 at 10:39AM

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 social networking specialist responded to a short-seller and announced a share repurchase program.

What happened

Down 55% in three months, Dubai-based Middle Eastern and North African social networking company Yalla (YALA -0.96%) has had a rough start to 2021 -- a rough start that got worse this week, when short-sellers at Gotham City Research began attacking the stock as an "ugly duck" headed for bankruptcy.

Today, shares of Yalla are rallying 22.3% as of 10:13 a.m. EDT as management responds to the short attack -- and announces a stock buyback.

Global map turned to show Middle East and North Africa.

Image source: Getty Images.

So what

Yalla held its IPO back in September 2020, and the stock rose steadily until things started getting shaky in the tech sector in February. Since then, it's been mostly downhill for the company, despite reporting strong sales growth and a doubling in net income earlier this month.  

For fiscal Q1 2021, Yalla grew its sales 221% year over year, with revenue from "chatting services" making up the bulk of the social media company's sales, and games services revenue making up the balance. Net profit for the quarter was $33.6 million -- $0.19 per diluted share -- up 171% year over year, and management predicted that growth will continue into at least Q2, with revenue more than doubling to a range of $65 million to $71 million.

Now what

And yet, Gotham Research doesn't think the numbers are believable. "Does this [Yalla] make sense?" asks the analyst, "a business supposedly based in Africa, CFO/auditor in East Asia, and investor base in North America" growing this fast?

Gotham clearly doesn't think so, but consider: According to the Washington, D.C.-based Population Reference Bureau, the Middle East and North Africa region has the world's second-fastest rate of population growth at 2% (second only to sub-Saharan Africa). It actually kind of does make sense that a region growing its customer base faster than almost anywhere else in the world would boast strong growth rates in its businesses.  

Responding to Gotham's short attack, Yalla calls the short-seller's claims "distorted, misleading, and unsubstantiated" -- and puts its money where its mouth is, announcing a stock buyback of up to $150 million of its shares. That seems a reasonable course of action to me (although I'd be even more encouraged if management would begin including cash flow statements in its earnings releases, so we can check the math).

Still, absent more than just the musings of a short-seller, I'd suggest not jumping to the conclusion that this company is an "ugly duck" just yet.  

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Yalla Group Limited. The Motley Fool has a disclosure policy.

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

Yalla Group Limited Stock Quote
Yalla Group Limited
YALA
$4.11 (-0.96%) $0.04

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

Motley Fool Returns

Motley Fool Stock Advisor

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

Stock Advisor Returns
397%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/20/2022.

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.