What happened

Shares of Huya (HUYA -3.20%) were down 10.9% as of 1:13 p.m. ET on Wednesday after receiving an analyst downgrade following its third-quarter earnings report.  

A weak economic environment in China has weighed on Huya's operating results this year. Year to date, the stock has fallen 59%, and Citigroup analyst Brian Gong sees more headwinds in the near term.

So what

In the third quarter, Huya reported a 20% year-over-year drop in revenue, which translated to an adjusted loss on the bottom line. The analyst sees higher content costs further weighing on financial results. As a result, Gong downgraded the stock to a sell rating with a $3 price target.  

Huya finished the quarter with 86 million mobile monthly active users, but paying users fell to 5.5 million from 6 million in the year-ago quarter. The long-term growth of the esports industry is a catalyst for Huya, but the analyst believes it could be difficult to improve growth due to China's slowing approval process for new esports titles. That, in turn, will make it challenging for Huya to accelerate revenue and monetize its users.

Now what

On the positive side, revenue should recover when the economy gets better. Meanwhile, management is optimizing operations to improve profits, citing a reduction in operating expenses of 27% as evidence of its progress. 

Even with a slower pace of new game approvals, investors should expect the growing interest in esports to spur new titles over time that drive interest in live game streaming. Despite the challenging operating environment, China is still the world's largest esports market, which grew 14% in 2021. 

If Huya can continue to reduce operating expenses, the stock could be a tempting buy at these lower share prices.