Shares of Chinese live game streaming platform Huya (NASDAQ:HUYA) hit the public markets with a bang in May of 2018, sprinting from a $12 Initial Public Offering (IPO) price to a $50 price tag about a month later. Investors were betting big on the idea that Huya could turn into the Chinese Netflix (NASDAQ:NFLX) of gaming, thanks to sizable tailwinds in e-sports, Chinese digitization, and live game streaming consumption.
That never happened. Instead, the first month surge to $50 was as high as HUYA stock ever got. A few months later, as trade tensions slowed economic activity in China and the Huya growth narrative lost steam, HUYA stock found itself down around $15. Shares have been range-bound ever since, violently bouncing between $15 and $30 without making any material progress back towards $50.
That could change in 2020. There are five big reasons why Huya is a long-term winner, and two reasons why the market will start believing that in 2020. Simultaneously, the market will quickly realize that HUYA stock is dramatically undervalued, and shares will march higher in a hurry.
How much higher? My numbers indicate that shares could double by the end of this year. Needless to say, that’s compelling upside potential. And I think it’s going to happen. Here’s why.
5 Big Reasons Why Huya Is a Winner
Zooming out, there are five big reasons why Huya is a long-term winner:
- China’s digital economy will be huge. China has over a billion people. Only 60% of them are connected to the internet. Developed countries, like the U.S. and Canada, have 90%-plus internet penetration rates. China will get there one day. On its way there, the Chinese internet economy will add hundreds of millions of participants, and turn into one of the most valuable markets in the world.
- E-sports and live game streaming is wildly popular. Across the globe, there are 265 million soccer players. There are nearly five-times that many video game players globally, at over 1.2 billion. Those 1.2 billion gamers want to compete, earn, and be entertained just like those 265 million soccer players. As such, e-sports and live game streaming will one day be huge around the globe, just like pro soccer. The market will be especially large in China, given how addicted China’s youth are to video games.
- Huya can rely on network effects to remain “top dog” in China’s live game streaming market. Huya is already the largest live game streaming platform in China. They can leverage this unparalleled size to sustain dominance in the market for the foreseeable future.
- It’s an international company. Huya is more than just China. The company already has streaming operations in Argentina, Mexico, and other Spanish-language speaking regions. Huya can further leverage network effects to gain considerable traction in each one of these new markets, too, and eventually turn into a global game streaming giant.
- The company has huge profit potential. Huya is already showing profits on the income statement. Those profits will only get bigger as revenues get bigger. Thus, the long-term profit growth potential here is enormous.
2 Big Reasons Sentiment Will Turn
Before HUYA stock starts acting like a winner, the market will need to believe it’s a winner. That will start happening this year for two big reasons:
- China’s economy will rebound, powering a big China internet stock rebound. China’s economy faltered in 2018 and 2019 amid escalating global trade tensions. Those trade tensions will ease in 2020. As they do, China’s economy will rebound. This rebound will bring investors back into China internet stocks, which remain supported by favorable long-term fundamentals but were butchered on near-term trade war concerns. HUYA stock is one of those stocks. Consequently, investors will be drawn back into HUYA stock in 2020 amid China’s economic rebound.
- Huya will gain big traction internationally. Huya only has 17 million monthly active users in overseas market. But, “overseas” was mentioned 19 times on the company’s most recent earnings call. From that call, it is clear that overseas expansion in Argentina, Mexico, and other Spanish-speaking regions is of paramount importance to management in 2020. This expansion should be successful, given the platform’s network effects and healthy e-sports tailwinds. Successful international expansion will prove that Huya is much more than a “China only” company. This breakout to global tech company status will meaningfully boost investor sentiment.
Huge Upside Potential Remains
The most attractive thing about HUYA stock here and now is the fact that shares are materially undervalued.
My long-term model on Huya makes a few simple assumptions. First, monthly actives on the platform doubles over the next several years, hitting 300 million by 2025 (from about 150 million today). Second, the amount of paying users grows in-step with the monthly active user base. Third, Huya’s revenues grow, driven by increases in spend per paying user and ad revenue per monthly active user. Fourth, Huya’s profit margins improve with scale.
Under those four assumptions, I believe Huya can do about $1.25 in fiscal 2021 earnings per share. For what it’s worth, consensus Street estimates sit at $1.15 for 2021 profits.
Based on an application software sector-average 35-times forward earnings multiple, that implies a 2020 price target for HUYA stock of well over $40. Thus, if Huya does start to fire on all cylinders in 2020, HUYA stock could easily double in a hurry.
Bottom Line on HUYA Stock
Huya has long-term winner written all over it. Big growth company. Huge growth opportunity. Clear pathway to tapping into that opportunity. Healthy margins. Huge profit growth potential.
Yet HUYA stock isn’t being priced like a long-term winner. This disconnect won’t last forever. In 2020, favorable developments in the Huya growth narrative will close the gap between share price and fundamentals. This dynamic could ultimately result in HUYA stock doubling over the next few months.
As of this writing, Luke Lango was long HUYA and NFLX.