YY Inc (ADR) (NASDAQ:YY) stock dropped like a rock in early trading, falling as much as 8% after its first-quarter earnings report.
After going on a two-year, 344% tear in 2013 and 2014, YY stock is up a mere 2.5% in 2015 as its momentum slows. But today, Wall Street is overreacting to YY earnings, which absolutely do not warrant the whipping YY shares are taking in the stock market today.
But what’s causing the selloff, and why should you ignore it?
Let’s get down to the nitty gritty.
Understanding YY
The Guangzhou, China-based YY is a social Internet platform offering real-time voice, video and text chat between users. A good comparison to its services in the U.S. would be the Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) Hangouts functionality.
YY also has diversified into the realm of online dating and music in hopes of becoming a true modern-day Chinese media mogul. In that respect, the company is similar to IAC/InterActiveCorp (NASDAQ:IACI), which owns brands like Match, OkCupid, Tinder and Vimeo.
However, grand ambitions ended up hurting YY stock on Tuesday. Despite soaring revenues that topped expectations, earnings missed expectations as margins were pressured by a revenue mix-shift to the lower-margin music and dating segments.
First-Quarter Pullback Breeds Attractive Valuation
Revenues grew by a spectacular 73% year-over-year, topping Wall Street’s call for a 66% gain. Non-GAAP earnings of 70 cents per share, however, came in 3% below consensus, and margins went into free fall. From the December quarter to the March quarter, gross margins cratered from 46.1% to 40.9%.
Analysts acted like the YY earnings miss was a death knell for YY stock, and both Deutsche Bank and Barclays decreased their price targets on shares to $75 and $82 per share, respectively.
In general, I’m not a huge fan of Chinese stocks. I don’t like their overexposure to the slowing Chinese economy, many of them trade at insane valuations that are impossible to justify, and there’s been a troubling history of accounting fraud I can’t bring myself to forget about.
But YY stock is different. In fact, I think it’s a steal, especially after today’s pullback. It trades at just 22 times earnings, and just 12 times forward earnings. YY stock’s price/earnings-to-growth ratio — a metric typically considered to indicate a compelling buy when it registers below 1 — is a rock-bottom 0.4.
Why?
Fellow Chinese internet and media companies like Sohu.com Inc (NASDAQ:SOHU) and Youku Tudou Inc (ADR) (NYSE:YOKU) have each garnered multibillion-dollar valuations despite the fact that neither one is expected to be profitable for at least the next two years.
Considering its peers, its rapid growth, and its expanding ambitions, I think YY stock actually looks like a great buy for long-term value.
That’s tough to find in China, but when you see it, it’s hard to ignore.
As of this writing, John Divine was long shares of GOOG stock and GOOGL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
