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Huya Stock Is Far Too Cheap and Getting Ready to Bottom Out

HUYA stock has plunged, but there's reason to see a rally on the way

By Vince Martin, InvestorPlace Contributor

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Can Huya Stock Set Up for Another Massive Breakout?

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The story surrounding Huya Inc (NYSE:HUYA) isn’t unique in this market. Like so many Chinese tech plays, HUYA stock has pulled back sharply over the past few months.

There’s no shortage of similar “buy the dip” candidates in that market, as Josh Enomoto detailed last week. But HUYA stock looks particularly attractive. Its growth is much faster than that of other Chinese tech plays. It’s fallen further than peers. And the so-called “Twitch of China” has a multi-year growth runway.

Like any tech play, Huya stock has risks. And it’s possible there’s another leg coming in the long-running China sell-off. But it’s worth taking on those risks – and trying to time the bottom.

The Opportunity for Huya Inc

Like Twitch, now owned by Amazon.com (NASDAQ:AMZN), Huya Inc operates a game live streaming platform. According to the company’s F-1, Huya has the #1 platform in the Chinese market. Figures from that filing show the market has grown 40%+ the last few years and is expected to grow well over 20% annually over the next few years.

Market growth alone creates an enormous opportunity for Huya. eSports growth in the U.S. continues to impress, and there’s little reason to see the developing Chinese market as playing out any differently. And it’s worth noting Amazon paid nearly $1 billion for Twitch in 2014 – in a deal that four years later looks like an absolute steal. Huya Inc now is valued at a little over $3 billion.

Why Huya Stock Has Sold Off

Of course, investors are well aware of the opportunity at this point, more than six months after the company’s IPO. And yet HUYA stock has dropped by 67% from June highs.

Obviously, the sell-off in Chinese tech stocks has been a factor. HUYA isn’t alone in plummeting. iQiyi (NASDAQ:IQ) is down 60% from its highs. JD.com (NASDAQ:JD) has dropped 57%. Weibo (NASDAQ:WB) has been halved. Trade war concerns and a stronger dollar (which lowers the value of yuan-based profits) have been two of the drivers in a broad sell-off.

And it’s possible, with a thin post-IPO float, that HUYA ran too far back in June. The ~$10 billion valuation implied at the highs might have been prohibitive. But a $3 billion enterprise value seems far too low, and it’s not like anything in the performance of Huya Inc justifies the sell-off.

Indeed, Huya posted a nice Q3 beat last month, with revenue and earnings ahead of analyst expectations. Revenue rose a whopping 118% year-over-year, and a loss the year before reversed to an adjusted profit of $0.08 per share.

Yet, like so many stocks in this sell-off, investor fears have overwhelmed solid results. At a certain point (potentially some time soon) that should change.

Has HUYA Bottomed?

Of late, even with some nervousness in U.S. stocks, Chinese stocks have started to stabilize. HUYA stock touched an all-time closing low of $14.66 last week but it’s since rallied 14% in a matter of sessions.

There have been some false bounces for the stock, admittedly (the same is true for Chinese issues as a whole) and this could be another one. But at a certain point, the risks are priced in and the rewards are not. And it certainly seems like we’re at least nearing that point.

After all, the fundamental bull case here is almost ridiculously easy to make. Yes, Chinese stocks have sold off due in part to real fears. But HUYA stock has sold off more than pretty much every other mid- to large-cap tech stock. At the same time, Huya’s growth is much faster than those peers. And yet the stock trades at just 35x 2019 EPS estimates, a reasonable if not outright cheap multiple for a company growing revenue 100%+.

At these levels, Huya is pricing in a reasonable probability of a disastrous outcome. For HUYA to keep plunging, either the Chinese economy has to collapse or the company’s business needs to be significantly disrupted.

Neither risk can be completely discounted. Fears of a Chinese bubble have persisted for years. Trade war pressure could be the catalyst for a long-awaited recession. And Huya is facing significant competition, notably from privately held Douyu (which, like Huya Inc, is backed by Tencent (OTCMKTS:TCEHY)).

But all stocks have risks. Few have the potential rewards of HUYA.

The Case for HUYA

I don’t know that I’d expect HUYA stock to return to its highs near $50, at least not immediately. But there’s a path toward a big rebound here.

Analysts are projecting EPS of $0.47 next year on the back of 53% revenue growth. Come 2019, investor eyes might start to looking to 2020 as a base for valuation. Something like $0.60-$0.70 – growth of 25-50% – hardly seems unlikely. A more confident market can value HUYA at a 40x-50x multiple with that kind of growth. That in turn values HUYA at $25-$35 – at least 50% upside from current levels.

Fundamentally, that’s not an extreme model. It simply requires that Huya Inc keep doing what it’s doing; that the growth in its end market remain intact; and that investors stop pricing Chinese stocks as if the worst is yet to come. In essence, it requires normalization.

Again, investors can make similar cases for a number of Chinese tech plays (I’ve made the argument for IQ as well). But few stocks in China or anywhere else are growing as fast as Huya is. And HUYA stock is available for 35x earnings – with a huge long-term opportunity.

Investors are selling that opportunity based on near-term worries but that seems foolish. And it leaves HUYA stock far too cheap.

As of this writing, Vince Martin has no positions in any securities mentioned.


Article printed from InvestorPlace Media, https://investorplace.com/2018/12/huya-stock-ready-to-bottom-out/.

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