Once again, YY (YY) delivered another blockbuster quarter that exceeded analysts' estimates on both the top and bottom lines. Revenue increased 43.3% to $518 million compared to the corresponding period last year. Analysts were expecting revenues to be around $491 million.
Robust growth was primarily attributed to strong live streaming revenues, which jumped 47.4% year-over-year (YOY). Monthly active users (MAU) jumped by 23.9% to 77.6 million and total live streaming paying users increased by 17.3% to 6.9 million.
On a quarterly basis, the number of live streaming paying users jumped from 6.5 million to 6.9 million which was the second highest jump over the past five quarters. With the rapid rise in virtual gifts, YY's business model allows the company to take a cut of the proceeds that members pay (to help show their appreciation) to other broadcasters.
Because a large chunk of revenue comes from virtual gifts, analysts have a hard time projecting what YY will do on both the top and bottom lines every quarter. This proved true once again as YY delivered earnings per share of $1.72, which easily beat analysts' estimates of $1.52. The report shows the company is still a tremendous growth story as it flashes its dominance with another blowout quarter.
As we stated in our April article - Live-Streaming Titans: Momo Or YY? The Answer May Surprise You - there was no need for investors to freak out about YY's revenue guidance heading into Q1.
Despite handily beating estimates in March (Q4), shares sunk as investors overreacted about mid-point revenue guidance coming in just below analysts' estimates ($488M vs. $491M). Like we said, investors should not have been worried about guidance coming in just below consensus estimates as the company has met or exceeded revenue estimates for years now and has a history of under-promising and over-delivering on earnings day.
And that's exactly what happened again as China's leading live streaming social media platform crushed estimates and sent shares climbing after hours. Q2 revenue guidance came in above estimates with management expecting revenues between $573.9M and $589.9M. Analysts were expecting revenues to come in around $570.3M. Seeing as how YY always under-promises and over-delivers on earnings day, it won't surprise us to see revenues come in around $600M.
Despite the positive reaction after hours, shares didn't soar very long as they quickly turned south during pre-market hours. Shares continued to tumble throughout the day despite the solid quarter as shares closed the day down more than 14%.
So, what happened?
That's the question investors everywhere are asking. While we don't have all the answers, we do have several theories as to why shares sold off.
Like many, we were disappointed to see shares tumble despite another solid quarter. As we've noted in past articles, YY is still undervalued and provides current investors a great opportunity to make tremendous returns over the coming years, especially with last week's announcement about YY's $272 million strategic investment in Bigo, which we believe is a huge game-changer for the company and which we will detail in a coming article.
|Q1 2017||Q2 2017||Q3 2017||Q4 2017||Q1 2018|
|Earnings Per Share||$1.40||$1.53||$1.59||$2.27||$1.72|
|Monthly Active Users||62.6M||66.1M||73.0M||76.5M||77.6M|
|Streaming Paying Users||5.8M||5.7M||6.3M||6.5M||6.9M|
Prior to the earnings report, shares of YY had surged nearly 30% over the past month. Despite a few concerns that we will get into below, traders took the opportunity to cash out. Short sellers likely fueled the fire as well as short interest in YY is up 25% over the past two months.
Another concern was related to YY's announcement in its earnings report stating the company expects to report a net loss in Q2 due to a loss on derivative liabilities ($360 million) related to preferred shares of Huya (HUYA). The game streaming platform, a majority-controlled subsidiary of YY, priced its initial public offering at $12 last month and set a 52-week high on Wednesday before closing up 7.51% at $38.94. However, YY's management didn't provide enough color about the details which prompted some investors to trim their positions. This Seeking Alpha article talks more in-depth about the derivative loss.
Costs continue to climb too and are up 46.4% compared to this time last year. On the conference call, management attributed the increase due to revenue-sharing fees and content costs. With the Company’s efforts to expand and strengthen its relationships with performers and enrich its live streaming content offerings - which is a smart move in our opinion - it does come with costs, as YY increases its revenue-sharing fees with its users/performers.
Lastly, Q1 showed signs of MAU growth slowing down. After adding an average of 4.6 million users per quarter from Q1-Q4 in 2017, YY reported an increase of just 1.1 million users during the latest quarter. While the big jump in live paying users was great to see and which contributed to the massive beat on both the top and bottom lines, YY will need to show better MAU growth and continue to add live paying users over the coming quarters to win over more investors.
Valuation: $200 Per Share
As of Wednesday, YY has a market capitalization of $7.2 billion. Meanwhile, Huya - which we expected would double over the next 1-2 years and which we have clearly underestimated - has seen shares more than triple in just the past month. Huya's market capitalization now stands at $7.8 billion after setting another 52-week high this week.
Considering YY (post-IPO) holds a 44.5% stake in Huya, just shows how undervalued the company is at the moment. At the end of Q1, YY had cash, cash equivalents and short-term deposits totaling just over $2 billion and no debt.
Bigo Live which has exceeded 200 million registered users and has monthly active users of around 40 million, was valued at $400 million last year after its series C round. Seeing as how the number of users has tripled over the past two years, Bigo's valuation is likely well above $1 billion at the moment and only adds to YY's growing valuation.
In 2014, YY, which already owned a 27.8 percent stake in Bigo, recently announcement that it was investing $272 million in the series D round to make YY the largest shareholder. The company also obtained the right to purchase additional shares of Bigo after a year to get a controlling stake (50.1%) of voting power.
Considering YY's stake in Huya is now worth approximately $3.5 billion and with more than $2 billion in cash, YY is as undervalued as it comes in the market. Discounting its valued stake in Huya and its current cash hoard, YY sits at a market capitalization of just 1.7 billion, or less than one times sales.
|YY||Momo||Industry Average (software & services)|
For a company that is on track to grow revenues by nearly 40% this year and EPS growth of more than 25% next year, YY is trading at a complete bargain at current levels.
If YY's value was based on the industry average, shares would be sitting at $177 based on the trailing price-to-earnings ratio. On a forward-looking level, shares would be valued at $196 based on 22 times projected earnings over the next 12 months. And with over $32 in cash per share, shares would be sitting at $228, or approximately 100% upside from Wednesday's closing price.
No matter what other multiples or ratios one uses, investors will find that YY is still heavily undervalued. Based on 10 times sales - which is still under the market average - YY would be worth $19.2 billion or just over $300 per share.
Dropping it down a bit and looking at 8 times sales which is consistent with many Chinese companies like MOMO (MOMO), Baozun (BZUN), Ctrip.com (CTRP), Sina (SINA), Baidu (BIDU), etc., YY would sport a market capitalization of $15.3 billion or $242 per share, which does not even include the $32 in cash per share.
However, having invested in YY since 2015, we've seen some wild things take place, including YY's CEO David Li who tried to take the company private in 2015. And based on the market's sentiment with YY over the years, we believe analysts will continue to stay conservative on the company compared to some of its peers.
This has been evident over the past week as analysts have come out with new price targets for YY. Despite crushing analysts' estimates once again, some analysts have cut their price targets as UBS lowered their target from $160 to $150 and Nomura from $161 to $152. CLSA Upgraded YY to a BUY from Outperform and JPMorgan raised its price target from $145 to $155. Among all the analysts covering YY, the average target stands at $153 with the highest target set at $180, with the lowest at $106.
While we feel YY deserves to trade at the industry average (20-25 times earnings) and on the level of most of its Chinese peers, shares will likely continue trading at a discount at 15-20 times earnings.
This means that based on 2018 expected earnings, shares would be valued between $124-$165 ($144.5 average) per share, and $157-$210 ($183.5 average) in 2019. This, of course, does not take into account the $32 in cash per share. Because of this, we reiterate our BUY rating on YY and set a 12-month price target at $200.
|Cash per Share||$32.43|
Despite the unwarranted earnings selloff, YY remains a great growth story and is set up for remarkable growth in the future with its recent strategic investment in Bigo. With over $2 billion in cash and (basically) debt free, there aren't many companies in the market right now that are as undervalued and well positioned as YY is.
With so much growth, investors currently have a great opportunity to pick up shares at a discount. Last year, YY jumped nearly 200% and was one of the best-performing stocks in the entire market. With nearly 80% upside with our conservative 12-month price target of $200, investors have another golden opportunity to cash in on what should be another big year.
While management continues to deliver remarkable growth, the company needs to do a better job at giving investors more color and clarity with regards to its business actions. From unexpected secondary offerings, to management's go-private bid three years ago and this quarter's announcement about a derivative loss related to preferred shares of Huya, investors tend to get caught off guard. Because of the lack of information sometimes, investors tend to question management's commitment of delivering shareholder value.
Because it operates as a social media platform in China, YY is often at the mercy of the Chinese government, which has been known to crack down on companies by banning them until they clean up their act. While companies have been banned and forced to close due to inappropriate material, we strongly believe continued regulation will only help well-established companies like YY to continue to grow as would-be competitors drop off due to regulation.
Lastly, Chinese politics - which we've seen with China's legislature removing presidential term limits and trade war talks with the U.S. - over the past few months has hurt all Chinese companies. If a trade war develops, YY, despite its social media platform, has shown that it too will be impacted as investors wait on the sidelines and reduce their holdings in Chinese equities.
As we've said and continue to say, YY continues to be an attractive company that should still be looked at as a possible takeover candidate from one of the major players. With Tencent (OTCPK:TCEHY) already making a push to acquire Huya, it wouldn't be out of the question to see the tech giant make an all-out offer to acquire YY and get the entire package too (Bigo, etc.).
YY is growing in arguably one of the hottest markets (live streaming) and is well positioned to capitalize on the massive growth that is still to come. The company's future remains bright, the growth story remains intact and shares still have plenty of room to run.
Next stop: $200.
Disclosure: I am/we are long YY, MOMO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.