Investors could be forgiven for avoiding Huya’s [HUYA] stock. Over the past month, the video streaming platform’s share price has fallen over 35% as of Friday 13 August’s close. The catalyst was the Chinese regulator blocking Huya’s planned $5.3bn mega-merger with DouYu [DOYU] in July. The deal would have brought together the two biggest video gaming streaming platforms in the country.
With sentiment already low around China tech stocks after recent headline-grabbing state interventions, investors might be wondering whether Huya’s stock is worth the risk. Huya’s stock dropped 6.3% last week, including a 1.94% drop on Friday as part of a wider rout in China’s tech sector.
Huya's share price fall over the past month
The second quarter numbers could reverse the investment case for Huya as Beijing continues to rein in its tech sector.
When is Huya reporting Q2 earnings?
Why should investors care about Huya’s earnings?
China tech giant Tencent [TCEHY] had initially proposed merging Huya and DouYu to streamline its sizable stakes in both companies. China’s State Administration of Market Regulation (SAMR) blocked the deal on antitrust grounds in mid-July. Since then, Huya’s share price has tanked, along with DouYu’s which is down over 30% from 12 July.
A falling share price could indicate a buying opportunity, although investments in China stock companies come with the added risk of Beijing’s current desire to flex its muscle over the sector. Still, Huya’s underlying fundamentals look decent, with the stock now being potentially undervalued.
Huya's Q1 revenue - an 8% YoY rise
In the first quarter, Huya’s revenue increased by 8.0% to RMB2,604.8 million (US$397.6 million), from RMB2,411.9 million for the same period of 2020. Non-GAAP income was RMB265.9 million (US$40.6 million) for the first quarter of 2021, representing an increase of 0.9% from RMB263.4 million for the same period of 2020.
The average number of monthly active users on Huya Live was relatively flat in the first quarter, coming in at 75.5m, compared to 74.7m in the same period the previous year. However, the total number of paying users of Huya Live fell to 5.9 million in the quarter, compared with 6.1 million in the first quarter of 2020.
Weighing up the two companies in July, The Motley Fool’s Josse Najarro suggests Huya beats out DouYu on several metrics, including net income and cash flow. Both, according to Najarro, have a strong balance sheet and no debt, and look undervalued.
In terms of price to earnings, Huya has a forward P/E of 11.26 while DouYu has a forward P/E of 12.82 - both relatively inexpensive for a tech stock. Najarro adds that the metric has come down over the past year and a half, even as the companies have grown bigger.
“The forward-price-to-sales ratio for Huya has fallen dramatically and is at levels seen during the first half of 2020. The correction could be providing long-term investors with a buying opportunity."
“The forward-price-to-sales ratio for Huya has fallen dramatically and is at levels seen during the first half of 2020. The correction could be providing long-term investors with a buying opportunity” - Josse Najarro
What is Wall Street expecting?
Expectations are that Huya will post earnings of $0.14 per share, down from $0.22 per share in the same timeframe last year. Revenue is pegged at $441.06m, a 10.5% increase from the $399.24m in the first quarter of 2020.
For the full year, Huya is expected to pull in $1.9bn in revenue, up 12% year-on-year. In 2022, expectations are for $2.18bn in revenue, a 14.7% year-on-year increase. In comparison, DouYu is expected to pull in $1.51bn in revenue, a 0.7% rise year-on-year, while in 2022 revenue is forecast at $1.74bn, a 15.6% jump.
Huya's expected full year revenue - a 12% YoY rise
Is a beat on the cards? Well, Huya has managed to beat expectations for the past four quarters. Non-GAAP diluted net income per share in the first quarter was $0.17 per share, beating Wall Street expectations of $0.13 per share.
Analysts tracking Huya’s share price on MarketBeat have pinned an average $22.33 price target on the stock, representing a 121.1% upside on its 13 August close. Meanwhile, DouYu has an average price target of $14.71, which would see a 326.4% upside.
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