JOYY (YY +0.88%) recently became one of the market's most talked-about Chinese tech stocks amid rumors that it could be taken private.
On Aug. 27, Reuters claimed that JOYY chairman David Li and Xiaomi founder Lei Jun were in talks to take the company private for $75 to $100 per share. JOYY could also spin off Bigo, its core subsidiary and the segment that generates most of its revenue, in a new listing in Hong Kong or another Asian exchange.
JOYY's stock was only trading in the low $60s when that story broke, so some investors sensed an opportunity to profit from the rumored deal. But later that day, JOYY declared on its Weibo account that it hadn't received any "formal" takeover offers.
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Should investors buy JOYY's stock, which tumbled more than 20% this year amid China's ongoing tech crackdown, as a potential buyout play? First, let's take a fresh look at JOYY's business, the motivations behind the rumored privatization deal, and if it properly values the company.
What does JOYY do?
JOYY went public in late 2012 as YY. At the time, YY generated most of its revenue from its namesake live streaming platform and related social networking services within China. China's livestreaming market initially grew like a weed, but it quickly became saturated and a major target for censors and regulators.
To pivot away from China, YY bought Singapore-based Bigo -- which owns the Bigo Live streaming platform, Likee short video app, and Hago mobile gaming network -- for $1.45 billion in 2019. It changed its name to JOYY later that year, then agreed to sell its entire YY Live division to Baidu (BIDU +0.88%) for $3.6 billion last November.
After JOYY's sale of YY Live closes, it will no longer generate any meaningful revenue from China -- Bigo Live, Likee, and Hago mainly serve overseas users in Southeast Asia, Latin America, the U.S., and Russia.
However, JOYY is still based in China, which leaves it exposed to the country's ongoing crackdown on its top tech companies. China's SAMR (State Administration for Market Regulation) hasn't approved Baidu's takeover of YY Live yet, and the CAC's (Cyberspace Administration of China) new data privacy laws could impact its cross-border data transfers.
U.S.-listed Chinese companies also face delisting threats in the U.S., as well as the potential elimination of the VIE (variable interest entity) business model that enabled them to go public via overseas shell companies.
JOYY's Chinese roots also caused all of Bigo's apps to be banned in India, one of its most promising growth markets, last year. All those headwinds suggest it would be smarter for JOYY to completely eliminate its Chinese business, go private, and relaunch its business overseas.
Is going private in the best interest of its investors?
Many Chinese companies that initially went public in the U.S. subsequently took themselves private, and then relisted their shares on Chinese exchanges at higher valuations. Even Sina, the Chinese tech company that pioneered the VIE IPO, took itself private earlier this year.
Most of those privatization deals were led by the companies' founders and CEOs, who either held massive stakes through their personal accounts or holding companies. As a result, any efforts by U.S. investors to block those abrupt offers -- which frequently undervalued the companies -- were futile.
The rumors about JOYY follow that troubling trend. The rumored takeover bid of $75 to $100 per share represents a significant premium to JOYY's current price, but the stock was trading at nearly $150 just seven months ago.
Last year, JOYY's revenue rose 112% to 13.23 billion yuan ($2.03 billion) as it integrated Bigo's higher-growth businesses. Analysts expect its revenue to rise 28% this year, with a narrower net loss.
Based on these estimates, JOYY trades at just 0.9 times this year's sales. JOYY also ended last quarter with $4.92 billion in cash, cash equivalents, and short term investments, which nearly matches its current market cap.
Therefore, a high-end bid of $100 per share, which values JOYY at nearly $8 billion, would still be too low for a company that generates double-digit sales growth with narrowing losses.
But if JOYY takes itself private and delists its U.S. shares, its spin-off of Bigo -- which served 307.5 million monthly active users (MAUs) last quarter -- might fetch a much higher valuation in Hong Kong, Singapore, or another non-U.S. exchange. The spin-off could also enable Bigo to reestablish its headquarters outside of China and escape the country's tightening regulations.
Should investors buy JOYY as a buyout play?
JOYY might look like a tempting investment right now since its stock is cheap, it's being indiscriminately dumped with other Chinese stocks, and the rumored buyout offer could net a 20%-to-60% gain.
But its sale of YY Live could still be nixed, the buyout rumors could fizzle out, and investors could still classify JOYY as a Chinese stock, even if it generates most of its revenue from other countries. So if you understand those risks, JOYY might be worth nibbling on. If not, you should stay very far away.
