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Despite Decent Earnings, These 2 Things Are Holding Huya Stock Back

HUYA stock has continued to plunge despite a strong earnings report

Chinese video streaming platform Huya (NASDAQ:HUYA) has mystified many of its investors this year. That’s because the company has posted seemingly strong earnings reports on several occasions, yet HUYA stock simply hasn’t gotten any traction.

The company did it again last month, when HUYA reported better- than-expected third-quarter numbers. Yet traders have dumped HUYA stock anyway, with the shares plummeting from $25 to $17 since the results. The continued weakness of Huya Inc stock price might not be quite as strange as it seems though. There have been a few developments that should give the owners of HUYA stock pause.

Huya’s Solid Earnings

While we’ll get to the bearish points in a minute, first we should acknowledge HUYA’s positive aspects. The company delivered another great quarter. Its revenues grew more than 77% year-over-year, topping analysts’ average outlook. Meanwhile, its earnings came in a penny better than the mean estimate.

And, for what it’s worth, Huya is already profitable. The company is expected to earn something like 40 cents per share over the next year. That doesn’t make HUYA stock, trading around 40 times that level, particularly cheap. However, in a fiercely competitive market like streaming video, merely earning profits is a good start, especially combined with the company’s blistering revenue growth. But investors might have a reason to take a deeper look at the numbers.

Huya’s CFO Swap

Not too long ago, Huya’s previous CFO, Henry Dachuan Sha, left the company, reportedly for family reasons. As a result, Huya just appointed a new CFO, Catherine Xiaozheng Liu.

Investors might view the hiring as a bit questionable. In her previous CFO stint, Liu worked at Yixin Group, an online auto financing company. Since it started trading in 2017, Yixin’s stock fell from 8 Hong Kong Dollars to less than 2 Hong Kong Dollars today, amounting to a 75% tumble. Before that, she served as Chief of Strategy of Qihoo 360, a controversial Chinese security software company that was dogged by short sellers when it was listed in the U.S.

A Chinese company facing a world of competition should want to project strength and credibility. I’m not sure someone who previously worked at Qihoo 360 and a struggling specialty finance firm would be investors’ first choice for the CFO role.

Tencent’s Backing

One of the major advantages of HUYA stock is the fact that the company has a huge, prominent investor. Namely, it received an investment from Tencent (OTCMKTS:TCEHY), China’s internet and gaming giant. Tencent owns a substantial chunk of the company, and – according to Huya’s latest annual report – Tencent has the right to buy a controlling, majority stake in HUYA.

As things stood as of that filing, YY (NASDAQ:YY) owned 52% of the voting shares of HUYA stock. So HUYA appears to have powerful backers who can determine the company’s strategy. That’s good, in a way.

But don’t get too excited about the prominent support. Tencent seems more than willing to diversify its bets. For example, the company also invested heavily in video service DouYo (NASDAQ:DOYU). DouYo launched its Initial Public Offering earlier this year and it’s been a flop, with the shares falling from $11 to $8 so far.

Tencent also just plowed another $2 billion into Kuaishou, an app which plays short videos, last week. Tencent has been a long-time investor in Kuaishou, which is a leading rival of ByteDance and its worldwide sensation, TikTok. And don’t forget about Tencent Video, which competes with iQiyi (NASDAQ:IQ). While Tencent has put a lot of support into Huya, that doesn’t necessarily mean that Tencent is fully committed to any one video platform.It just wants to have a major investment in an online video that gains critical mass.

The Bottom Line on HUYA Stock

Not everyone has give up on Huya Inc stock. Independent research firm Hedgeye, for example, recently added HUYA to its Best Ideas List. That isn’t surprising, since Hedgeye is also a long-time fan of YY. Hedgeye thinks HUYA stock can rally 30% and suggests the market is overly worried about competitive threats such as Kuaishou.

I’m not sure I’m as enthused about Huya Inc stock yet, though. There’s a ton of competition in this space. As we’ve seen in the U.S. lately, when too many competitors fight for a prized market, everyone’s margins plummet. And that’s in the U.S., where consumers are accustomed to spending a lot on paid video. In China, however, video is not such a highly-valuable property, at least not yet. As a result, it’s hard for so many high-powered video sites to all be profitable simultaneously in China.

HUYA certainly could still turn things around. But the arrival of a not especially well-known CFO hardly bolsters the argument that Huya will be able to outclass its rivals, though. For now, HUYA stock seems like a wait-and see equity, rather than something to buy today.

At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media,

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