China’s Huya (NASDAQ:HUYA) operates in some compelling, fast-growing niches, a trait that’s widely known throughout the investment community. However, considerable debate lingers around HUYA stock. Some view HUYA as a vexing name that’s bound to disappoint its owners. Others think that the shares can climb a great deal.
For those who aren’t knowledgeable about Huya, the company went public in May 2018 at $12 per share before rapidly ascending to a flirtation with $50. In early trading today, HUYA is changing hands for around $20.70.
Huya is one of China’s largest platforms for video-game streaming, making it something of a Chinese equivalent of Amazon’s (NASDAQ:AMZN) Twitch. The company also has exposure to the fast-growing e-sports market, though whether or not investors fully appreciate that trait is, at the moment, debatable.
Perhaps another underappreciated element of Huya is that, due to the company’s heavily domestic focus, it’s not highly sensitive to the trade disputes between the U.S. and China. Moreover, China is the center of the e-sports universe and the company’s monetization is still in its early innings. Given all of those realities, the 15% gain of Huya stock since the start of 2020 could be justified.
Even with its impressive start to the new year, HUYA stock is still about 35% below analysts’ average price target on the name, indicating that the stock has more ground to cover over the near-term or that some analysts could cut their price targets on HUYA.
Favorable Fundamentals
As in many other areas, the U.S. and China vie for supremacy in the global gaming market. Regardless of which country comes out on top, it’s hard to ignore the growth of gaming in China and the potential for that growth to be meaningfully positive for Huya.
By 2023, China’s gaming market could consist of 767 million players and be worth $41.5 billion, according to Niko Partners. Other estimates are even higher, despite China’s well-known censorship of games, which keeps many titles out of the country.
“Despite such limitations, China has become one of the largest digital gaming markets in the world, and has grown exponentially in the past few years due to the popularity of mobile games and eSports in the country,” notes Research and Markets. “The China digital gaming market is expected to expand at a compound annual growth rate (CAGR) of 15.4% during 2018-2023, and reach..revenue of USD 83.79 Bn by 2023.”
Then there is the potency of China’s e-sports industry, which is driving fevered devotion among gamers. Two Chinese teams Invictus Gaming and FunPlus Phoenix won a major international tournament over the past two years, leaving the fires of China’s e-sports industry ready to be lit.
“Huya currently derives more than 95% of its revenues from virtual gifting on its platforms, including core Huya and its subsidiary Nimo TV, a livestreaming platform focused on mobile in Southeast Asia and Latin America,” notes Roundhill Investments. “In addition to its core business, Huya owns Royal Never Give Up (League of Legends Team) and the Chengu Hunters (Overwatch Team). Huya also recently announced a JV with ESL to expand its esports competitions into China.”
The Bottom Line on Huya Stock
Trading at 26 times this year’s average earnings estimate, HUYA stock is comparably valued to some of its larger American counterparts, but it carries more risk. Still, a case can be made that Huya is 15% to 20% undervalued now, and some believe the shares can rally 30%.
Over the course of this year, much of the performance of Huya stock will boil down to how well the company executes and if the Chinese e-sports market grows as expected. Another key factor is if the company’s benefactors, Tencent (OTCMKTS:TCEHY) and YY (NASDAQ:YY) , will step in to support it if it runs into problems.
At the end of the day, Huya operates in compelling segments, but it can be hard to make good stock picks in these markets. Add in the emerging markets risk that comes with Huya’s China-centric model, and the stock is likely most appropriate for risk-tolerant investors who aren’t looking to hold the name for long periods of time.
As of this writing, Todd Shriber did not own any of the aforementioned securities.
