Blue Skies for China Streaming Champ YY

Let’s not make this any more complicated that it need be.

The Chinese Internet sector is hotter than the sun. It is the belle of the latest global carry-trade ball, which shows few signs of flagging.

We’re up 24% in two months on Tencent (TCEHY), but I now see even more upside in a much smaller and cheaper rival.

YY (YY) is China’s leading social live-streaming platform, the closest equivalent to YouTube in the world’s biggest market. It’s growing like an Internet powerhouse should, with revenue up 32% year-over-year to $385 million in the most recent quarter, and making out like a bandit with a 40% gross margin.

And while the share price has doubled year-to-date YY remains surprisingly inexpensive at 13 times this year’s estimated earnings and just 11 times next year’s. Market cap net of cash on the books is a bit shy of $4.5 billion

The stock pulled back in August after a strong quarterly report was followed by a secondary offering, but has since recouped those losses and is challenging all-time highs again. That puts it exactly where we want it.

YY’s principal source of revenue is the virtual currency it sells to viewers who then use it to reward their  favorite performers or to secure an edge in YY’s online games. The 10 million amateur channels on its platform attract 117 million monthly average users, with more than half now tuning in via their smartphones. Paying live streaming users were up 46% year-over-year to a still relatively modest 5.7 million.

Other than on its auxiliary gaming site, YY generates almost no direct advertising revenue, though the most popular of its programmers now do. So there is a huge runway here for at least one obvious source of new revenue. In any case, with Chinese disposable incomes on a tear once again and consumer confidence the highest in more than 20-years, YY’s near-term prospects of converting lots more virtual trinkets into cold hard cash have seldom looked better.

There are some inevitable wrinkles here, of course. All the usual risk warnings about a Chinese momentum stock apply in spades.

Additionally, YY depends on grassroots creativity and sharing in a society ruled by a totalitarian dictatorship. The government’s current crackdown on online message groups has many administrators of such groups on Tencent’s massive WeChat messaging platform closing them down lest they be held responsible for something posted by anyone else. There’s no knowing if and when someone on YY’s platform might trigger the authorities or how bad the blowback might get.

But don’t let any of that stop you from taking a flyer on a reasonably priced Chinese Internet player of note with lots of fundamental momentum and a decent likelihood of becoming a strategic prize for someone larger.

Buy YY below $100. You can also speculate on near-term upside via calls, specifically the Nov. 17 $75 calls recently offered at $8.30.

Stock Talk

Curtis H

Curtis H

Hi Igor, I purchased the call today at $8.15. Thanks, Curt

Mark F

Mark F

I modified the trade a bit and bought the 11/17 70 call for $10.40. Thanks.

Maria R

Maria R

I will be on vacation and may have no access to internet. I usually place a 25% trailing stop on my positions but I checked on your portfolio ( I am in YY,BEAT, IAC, etc) and there is no trailing stop. Please comment on your views.
Thanks, Mr. Igor

Igor Greenwald

Igor Greenwald

I hate stop-loss orders because they hurt many more people than they help. If you sold anything down 25% while on vacation without knowing or caring about the reason why it went down so much, it probably wouldn’t do you any good over the longer run. Consider a stop-loss order maybe 10% below the current price on your most volatile holdings if you’re worried, but honestly I wouldn’t bother.

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