It has been barely over a month since its initial public offering, and already, HUYA (NYSE:HUYA) is making a huge impact. The IPO scene is a rough one to call, with popular names like Blue Apron (NYSE:APRN) and Snap (NYSE:SNAP) producing disappointing performances. Can upstart HUYA stock break this trend?
At first glance, you have to like your chances with the Chinese video-based social network company. Primarily, Huya offers live streaming of video-game events and eSports tournaments. To those who are new to the concept, this sounds like people watching other people play video games. How can that possibly be “a thing?”
You don’t have to understand it, nor agree with it to recognize the investment potential for HUYA stock. As I and several of my InvestorPlace colleagues have emphasized, video gaming is a massive industry. More importantly, the gamer community has transitioned from nerd culture into a legitimate revenue-generating operation.
To put this into another perspective, sector participants actively engage their virtual passions. Last week, I discussed that Sony (NYSE:SNE) must rid itself of “old thinking.” At the time, Sony hindered cross-platform compatibility with the popular video game Fortnite. It’s a huge issue because 125 million people play Fortnite.
To put that figure into perspective, Japan’s population is a little over 127 million.
As it relates to HUYA stock, investors must carefully avoid cynicism. I’m sure video-game streaming appears like a waste of time to the older generation, but the kids love it, and that fervor is unlikely to wane.
I don’t think it’s any coincidence that HUYA stock stands alone among recent IPOs. Since May 11, shares have skyrocketed 166%. And this is true despite falling 12% on Tuesday’s session.
HUYA Stock Is a Great Play at a Bad Time
But why did Huya shares fall double digits if virtually every fundamental factor supports video-gaming firms? Given its dramatic run-up, investors are more likely to consider the recent volatility as a corrective harbinger.
Unfortunately, Huya happens to be one of those cases of a great company caught at a bad time. Yes, the firm capitalizes on the video-game streaming trend that’s caught like wildfire in the U.S. And of course, China’s population is 1.4 billion strong, so the conversion opportunity is paradigm-shattering.
Consider that years ago, TechInAsia.com reported that “China has more mobile gamers than America has people.” As video games become more popular in China, and especially as per-capita GDP improves, expect this chasm to widen.
With all that said, HUYA stock is a Chinese investment. Not that there’s anything wrong with that, but unless you’ve been living under a rock, you know that U.S.-China relations aren’t a bright spot in foreign policy.
In case my aforementioned scenario describes your situation, let me summarize. For decades, proposed peaceful solutions with North Korea required China’s help as China is North Korea’s biggest economic partner. They have clout. But with the recent meeting between President Trump and North Korean leader Kim Jong-un, that leverage diminishes. The U.S. essentially signaled that it can handle North Korea peacefully and independently of China.
Plus, you have the little bit where Trump accused the Asian juggernaut of stealing intellectual property. Because Trump’s critics blasted his North Korean overture, the easiest way for the President to act tough is to act tough on China with huge tariffs.
As a result, HUYA stock collapsed. But so too did many other Chinese stocks, including JD.Com (NASDAQ:JD) and Baidu (NASDAQ:BIDU).
Is Now the Time to Buy HUYA stock?
Hesitant investors may reason that while Huya’s underlining industry is extremely bullish, China overall is not. Moreover, even a strong sector like video games can’t overcome major geopolitical conflicts like a Trump-imposed China tariff.
I agree with this thinking, and I see pressure ahead for HUYA stock. I’m also not confident with the company at this juncture because even compared to other Chinese stocks, Huya badly underperformed.
But despite this nearer-term hesitation, I believe HUYA stock will eventually recover, and then some. I say that in large part because China’s video-gaming revenues continue to grow at double-digit rates. Plus, we’re talking about video games, which have become easily affordable for almost any working person. We’re not forecasting macro-economic trends, which is difficult to do under any circumstance.
So yes, I’m bullish on HUYA stock because video gaming has such massive, international appeal. Just be aware of the geopolitical context. For the next few weeks, if not months, you’re going to see volatility in Chinese companies.
As of this writing, Josh Enomoto is long SNE.
