Despite continued growth and multiple revenues and earnings beats, YY Inc. (YY) is still trading near multi-year lows. Due to trade war fears, investors seem to have dumped most or all Chinese stocks without regard for fundamentals or valuation. In February, we conducted a detailed valuation analysis of YY that showed that it was extremely cheap and worth a buy. We still continue to believe this is one of the best opportunities in value investing in the past few years.
Another great quarter
After the acquisition of Bigo in Q4 of last year, YY’s growth has accelerated significantly. YY’s revenue growth accelerated significantly to an over 47% increase YOY. Bigo has now become the main growth engine for the company.
User growth continued to be very impressive, with organic users increasing to nearly 60 million, up from below 40 million in Q1 of last year. Total MAUs, meanwhile, now total 400 million, which is just insane for a mid-cap technology company. This makes YY cheaper on a per MAU basis than even Chinese peers like Weibo (WB) and Tencent (OTCPK:TCEHY). Users in every segment increased at least double digits, with Bigo, the fastest-growing segment, growing MAUs by 160%.
Financials were also very strong, with revenues excluding Bigo beating the high end of guidance by over 5%.
Even excluding the effects of the consolidation of Bigo, we exceeded the high-end of our previous guidance mentioned by over 5% due to the strong financial performance for both YY and Huya segments.
- Q1 2019 earnings call
Profits didn't do well, though, but that was primarily the result of the Bigo acquisition. The acquisition caused sales and marketing costs to more than double, which reduced non-GAAP profits by RMB10 million. We expect profits to rise in the short to medium term after the Bigo consolidation is over.
YY's balance sheet is also now stronger than ever, with the company having paid for the Bigo acquisition mostly in stock. It has over $2 billion in cash and nearly $4.8 billion in shareholders' equity. That is over 85% of YY's market cap and shows just how undervalued it is, considering social media companies in the US trade at several times their book value, while YY trades just over 1x its book value.
The future of YY
YY is not only a live streaming giant, it is also becoming a social media giant in general, with multiple apps that let users do everything from video chat to play games to take short videos.
While acquiring Bigo, YY also acquired its subsidiaries Like and IMO. IMO is a video calling platform, similar to Facebook's (FB) WhatsApp. It has garnered a very respectable 200 million users, primarily in Southeast Asia, or SEA. Management believes that users of IMO's video conferencing feature can be monetized in the future.
(Source: Google Play)
Like is another app that YY acquired from Bigo. It's a short-form video app like TikTok, and it is the primary driver of growth in Bigo's MAUs. Management believes that this is only the beginning of the short video market.
(Source: Google Play)
YY itself has some social media apps. It owns Hago, which allows gamers to connect together and play games. Management mentioned that users of Hago spend over 1 hour on the app on average per day, and the company believes that the new features it has introduced will allow HAGO to be monetized.
Overall, YY has apps that cater to a large portion of the social media landscape. With a giant network consisting of millions of users and a great track record of launching popular apps, from Huya to Bigo Live, YY is well-positioned to be the leading social media company in SEA.
The one thing we don't like about YY is the fact that sometimes management doesn't answer questions. Management did not answer one analyst's questions about Hago's monetization in the Q1 2019 earnings call when asked about it, which could either be accidental or intentional. Sometimes the answers don't add up. When one analyst asked about YY dropping its credit rating, the company mentioned that it was more efficient to drop the rating, as it did not intend to raise capital via a bond offering - yet, it did just that a few weeks later.
We think the rewards outweigh the risks, and it's more likely that management probably misinterpreted analyst questions, but we also think investors should be prudent, even if the stock looks extremely cheap. Some things are just too good to be true, and we're not entirely sure if YY is one of these things.
In our last article, we mentioned that the risk of fraud was a real possibility, but we now we have changed our mind. There are multiple third parties that give credibility to YY, including Google Play, on which YY's apps have millions of ratings and constantly top the charts. Another third party, apptrace, also show YY's apps garnering high rankings. We believe this greatly reduces the probability of fraud.
(Source: apptrace - Bigo rankings)
With YY's large portfolio of apps, there is also a lower chance that it will be susceptible to shifts in consumer demand. Even if consumers prefer short video, the company has an app for that, Like, and will likely still survive. Therefore, the increasing popularity of TikTok is no longer a threat to YY.
YY's valuation seems to get more and more ludicrous by the day. It is now the cheapest stock we have seen on the market. It is fast becoming a social media giant in China and SEA, and the potential is definitely enormous. However, we believe investors should be careful nonetheless, as YY's transparency may not be similar to its peers in the US.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.