YY Inc. (NASDAQ:YY) continues to fall, even as the Chinese, video-based social media company increases its profits. The YY stock price has now dropped by more than 55% since achieving its 52-week high in January.
Both the falling stock price and the growing profits have taken its price-to-earnings (PE) ratio into single-digits. The possible geopolitical and industry risk may deter investors from buying YY stock. Also, investors tend to lose when fighting trends. For these reasons, investors should avoid YY stock until they know its downtrend has ended.
YY Stock Has Become Cheap but Challenged
At first glance, YY stock may look significantly undervalued. Analysts expect $7.22 per share in earnings this fiscal year. That takes the PE ratio to only about 8.5. Also, analysts forecast 9.6% profit growth for this year and 20.2% for the next year.
Despite these compelling metrics, YY stock trades near 52-week lows. It has also lost more than half of its value since January. Much like other peers in the Chinese tech industry, such as Alibaba (NYSE:BABA), Weibo (NASDAQ:WB) and Baidu (NASDAQ:BIDU), it has found itself victimized by the U.S.-China trade war. Even though most Chinese companies do not enjoy an American customer base, these stocks have fallen nonetheless.
YY stock itself may also suffer from another trend. YY Inc. once thrived on keeping consumers on its platform for hours per day. However, trends have moved toward much shorter video clips, as people began to consider live streaming too time-consuming. As a result, YY stock and stocks such as Momo Inc (NASDAQ:MOMO) and Huya Inc (NYSE:HUYA) fell out of favor.
To be sure, if the U.S. social media market offers any indication, investing in this industry can become difficult. Social media platforms may achieve a following and sometimes stock investors, based on the number of users. This led to an initial interest in Snap Inc. (NYSE:SNAP) following its IPO. However, as losses mounted and its competitive disadvantages become more apparent, Snap stock has continued to fall, despite its popularity among teenagers.
Watch and Wait on YY Stock
This may explain why investors have avoided YY stock despite its low valuation. However, YY Inc. enjoys one distinct advantage over Snap — it earns a profit. Not only does it make a profit, but it also manages to achieve double-digit profit growth. Despite a supposed loss of interest in YY’s platform, analysts expect double-digit profit growth through at least 2020.
This alone makes YY stock one to watch. That said, I mentioned before that the equity trades near its 52-week low. As stocks near this milestone low, they tend to continue falling. So, I would not buy immediately. However, once the charts begin to indicate that a more permanent low has become established, interested investors should consider buying at that point.
The Bottom Line on YY Stock
Although the low multiple and high profit growth of YY stock may tempt prospective investors, buyers should stay away for the time being. Admittedly, a low multiple in a high-growth, popular industry almost always constitutes a buy signal. It may in this case as well. However, rightly or wrongly, most Chinese stocks have sold off amid the U.S.-China trade war. This also occurs even when the company remains uninvolved in the U.S.
Still, YY stock also faces other challenges. The growing popularity of shorter videos could drive viewers away from YY. Also, stocks that trade near their 52-week lows tend to keep falling. For this reason, YY stock could continue its decline. Investors may see a compelling opportunity once the equity stops falling. However, at this time, investors should watch and wait.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.