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, suggests Igor Greenwald, editor of Breakthrough Tech Profits.
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 is currently cracking down on online message groups. And 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.
Igor Greenwald is editor of Breakthrough Tech Profits.
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