Huya Inc – ADR Stock, the Twitch of China, Has Massive Growth Potential

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Huya stock - Huya Inc – ADR Stock, the Twitch of China, Has Massive Growth Potential

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One of the newer and more exciting  names on the list red-hot, freshly-public China internet stocks is HUYA Inc – ADR (NYSE:HUYA).Huya stock is one to watch in a group that’s already teeming with possibility.

China internet stocks have been red-hot lately. And the growth isn’t coming primarily from the industry titans of Alibaba Group Holding Ltd (NYSE:BABA), JD.Com Inc(ADR) (NASDAQ:JD), Baidu Inc (ADR) (NASDAQ:BIDU), and TENCENT HOLDING/ADR (OTCMKTS:TCEHY).

Instead, the latest craze in China internet stocks has centered around a new breed of freshly public China companies that are smaller than the industry titans. This list includes the likes of iQIYI, Inc (NASDAQ:IQ), Baozun Inc (ADR) (NASDAQ:BZUN), Momo Inc (ADR) (NASDAQ:MOMO), and Bilibili Inc – ADR (NASDAQ:BILI).

Huya is China’s leading video streaming platform. As such, just as Baidu is labeled the Alphabet Inc (NASDAQ:GOOG) of China and Alibaba is labeled the Amazon.com, Inc. (NASDAQ:AMZN) of China, Huya is often called the Twitch of China.

That is a favorable comparison. Twitch is a hyper-growth company that operates in the hyper-growth overlap of the eSports and video game streaming markets.

Huya, too, operates in that overlap. But there is one big difference. Huya’s target geography, China, is home to the biggest video game audience in the world. And that audience is only getting bigger.

As such, Huya stock, which has taken off like a rocket ship since its IPO, could head even higher.

Here’s a deeper look.

The Huya Growth Narrative Is Really Strong

The video game market is one of the more exciting global growth markets at the present moment.

Traditional cable TV viewership is dying. Concurrent to that fall in traditional TV viewership is a rise is alternative entertainment viewership. Netflix, Inc. (NASDAQ:NFLX) has been a big beneficiary of this as a ton of eyeballs have shifted from cable channels to Netflix originals.

But another, more underrated, beneficiary of the fall in traditional TV viewership is the video game industry. Finally, the video game world’s live streaming market, a market wherein gamers watch other “professional” gamers play video games, is taking off.

Across the globe, live streaming video game viewership numbers are skyrocketing, and everyone from Amazon to Google to Facebook Inc (NASDAQ:FB) is investing big into this market.

But the biggest growth is happening China, where Huya reigns supreme.

China is the world’s largest games market in terms of revenue and gamers. In 2017, gaming revenues were $32.2 billion in China, versus $26.4 billion the U.S. The disparity is mostly driven by the fact that China has 646 million gamers, essentially double the entire U.S. population.

And this disparity is expected to only widen. Over the next five years, an expansion in China’s gamer base from 646 million to 917 million is expected to drive 13% compounded annual growth in gaming revenues. Meanwhile, in the U.S., gaming revenues are expected to grow at a mere 5% clip over the next five years.

Clearly, China is the big growth story here. And when it comes to China video game live streaming, Huya is king with almost 50% market share (83 million monthly active users last year versus China gaming monthly users of 180 million).

Consequently, as the China eSports and live streaming markets explode higher over the next several years, Huya stock will inevitably climb higher, too.

Huya Stock Could Head Higher

How much higher can Huya go? I peg fair value around $55, implying another near 20% upside.

Huya’s market share is falling marginally. But the company should be able to maintain 45% market share at scale. Thus, when China’s monthly active gaming user base is 350 million in 2022, Huya should have around 160 million monthly active users.

Last year, each one of those users generated $4 in revenue for Huya, versus under $2 in 2016. Last quarter, the annualized ARPU (average revenue per user) rate was over $5. This steady increase in ARPU should continue over the next several years at a robust rate thanks to growth in higher revenue-generating parts of the video game market, live eSports.

Therefore, I think Huya’s ARPU can trend towards $10 in five years, and get as high as $15. At the midpoint, and on 160 million active users, that should equate to about $2 billion in revenues in five years.

Gross margins should keep tracking higher while the opex rate should keep tracking lower thanks to scale. If that trend persists, then I think $2 billion in revenues in five years should flow through to about $3.20 in earnings per share.

A big-growth, Facebook-type multiple of 25-times forward earnings on $3.20 implies a four-year forward price target of $80. Discounted back by 10% per year, that equates to a present-day value for Huya stock of around $55.

Bottom Line on HUYA Stock

Huya stock went public at $12 per share.

Now, it is above $45. And it isn’t overvalued. Considering robust growth prospects through China’s massive live streaming and eSports video game markets, Huya stock makes a strong case to be worth north of $50 today.

As of this writing, Luke Lango was long BABA, JD, BIDU, IQ, MOMO, HUYA, GOOG, AMZN, and FB. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/06/huya-stock-massive-growth/.

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