Quick Take
DouYu (NASDAQ:DOYU) went public in July 2019, selling U.S. investors its ADSs at a price of $11.50 each. The firm operates a game-focused live streaming entertainment service for Chinese users.
DOYU looks well-positioned to benefit from the gradual reopening of China’s economy after the COVID-19 pandemic recedes but consumers remain wary of public events.
I’m bullish on the stock up to $11.50 per share.
Company and Market
Wuhan, China-based DouYu was founded in 2013 to develop and operate a game-centric live streaming platform in the country. Management is headed by founder, CEO and director Shaojie Chen, who previously founded and managed Shenzhen Zhangmenren Network Technology.
The firm’s monetization channels consist of live streaming, advertisements and others, of which live streaming accounted for 86.1% and 80.7% of its total revenue for 2018 and 2017, respectively. Its live streaming income is generated mainly by the sales of virtual gifts.
For Q4 2018, DouYu had 153.5 million average total Monthly Active Users (MAUs), a year-over-year increase of 14.3% from 134.3 million average total MAUs during Q4 2017.
As of the end of 2018, the company had 6 million registered streamers, of which 5,200 were "top streamers" with whom DOYU has signed a contract - an increase from 3.9 million streamers and 2,000 "top streamers", respectively, from last year.
DouYu’s average total eSports MAUs about 80.9 million and 95.8 million in Q4 2017 and 2018, respectively.
According to a 2018 market research report by Streamlabs, the global live streaming industry was valued at $10.1 billion in 2018 and is projected to reach $13.1 billion in 2019.
DoYou competes with other large social networks, video streaming platforms, and other online entertainment services that provide alternatives to watching eSports competitions.
Direct and indirect competitors include:
Recent Performance
DOYU’s top line revenue growth by quarter has been uneven but impressive:
Gross profit by quarter has grown sharply from just above $0 to nearly $60 million, as the chart below shows:
Operating income by quarter has varied greatly, but Q4 2019 was the firm’s best result to-date:
Earnings per share (Diluted) have fluctuated, but Q4 2019 produced the most earnings in the company’s history:
(Chart data source: Seeking Alpha)
Since its IPO, DOYU stock price has fallen 38.5 percent vs. the U.S. Entertainment index’s drop of 1.9 percent and the overall U.S. market’s fall of 3.8 percent, as the chart below indicates:
(Source: Simply Wall Street)
Valuation Metrics
Below is a table of relevant capitalization and valuation figures for the company:
Measure | Amount |
Market Capitalization | $2,220,000,000 |
Enterprise Value | $1,060,000,000 |
Price / Sales | 1.29 |
Enterprise Value / Sales | 1.02 |
Enterprise Value / EBITDA | -58 |
Free Cash Flow (TTM) | -$121,770,000 |
Revenue Growth Rate | 99.30% |
Earnings Per Share (Fwd.) | $0.39 |
(Source: Company Financials)
Below is an estimated DCF (Discounted Cash Flow) analysis of DOYU’s projected growth and earnings:
Assuming the above generous DCF parameters, the firm’s shares would be valued at approximately $11.57 versus the current price of $7.07, indicating they are potentially currently undervalued, with the given earnings, growth and discount rate assumptions of the DCF.
A comparable to DOYU would be HUYA. Below are their relative major metrics:
Metric | Huya | DouYu | Variance |
Price / Sales | 3.90 | 1.29 | -66.9% |
Enterprise Value / Sales | 0.26 | 1.02 | 292.3% |
Enterprise Value / EBITDA | 6.17 | -58.00 | -1040.0% |
Free Cash Flow (TTM) | $227,260,000 | $114,500,000 | -49.6% |
Revenue Growth Rate | 64.0% | 99.3% | 55.2% |
Commentary
In its last earnings call covering Q4 2019’s results, management highlighted its "strong top line growth," with net revenues growing sharply year over year along with impressive gross profit and net income growth.
The firm diversified its content coverage according to user demand, which it said "maintained a high level of overall user engagement and stickiness." Management is looking to build on this diversification by increasing its game developer collaboration efforts to increase its traffic and user growth. It is especially interested in focusing on premium eSports content.
Due to the COVID-19 pandemic, the firm saw some disruption to its operations but said that Q4’s overall results were positive and that the company was operating most of its divisions as normal, with the exception of in-person tournaments which were cancelled.
Compared to HUYA, DOYU’s stock price metrics look favorable given the firm’s higher revenue growth trajectory.
Also, my DCF analysis, which references forward expected earnings and a reasonable growth rate, puts a target price on DOYU of $11.50.
With many parts of China emerging from the COVID-19 pandemic lockdown but still likely eschewing public events, DOYU’s online entertainment looks well-positioned to benefit from a continued growth trend in this regard.
I view the stock as overly beaten down and have initiated a small position at $7.20. I’m bullish on DOYU up to $11.50.
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