Growth and Valuation Make Huya Stock a Buy on the Dip

In 2020, companies like Huya (NYSE:HUYA) benefited from the lockdowns created by the novel coronavirus pandemic. That’s created questions for investors in HUYA stock and other names in 2021.

the HUYA logo displayed on a mobile phone
Source: Piotr Swat / Shutterstock.com

After all, we know that what some called “pandemic winners” got a big boost last year. For instance, Huya users simply didn’t have all that much else to do.

What we don’t know, exactly, is what these businesses will look like in 2021 and 2022 as normalcy returns. Meanwhile, results this year will face abnormally strong comparisons.

In other words, a business like Huya simply may not look as strong in 2021 as it did in 2020.

But for long-term investors, that’s really not a big deal. The point for Huya in particular is that it’s growing — and growing nicely. How much of that growth came in 2020 versus 2021 simply doesn’t matter long term. That’s even ignoring the key fact that, given the company’s business model, the short-term pandemic bump will have a beneficial long-term effect.

Right now, the market seems to be ignoring that positive long-term outlook, and focusing instead on worries about what, precisely, 2021 will look like. HUYA stock has dropped 25% in a matter of weeks.

That dip looks like an opportunity. This is one of the better stories in Chinese tech, and after the pullback, HUYA stock looks downright cheap.

The Case for HUYA Stock

Huya is one of the two leading platforms in China for video-game streaming. It’s a big business — and it’s been a good business for Huya.

2020 results show just how good. For the year, Huya generated $1.67 billion in revenue, up 30% year-over-year.

And unlike a lot of growth companies in tech, Huya is nicely profitable. Adjusted net income last year came in just shy of $200 million, or 81 cents per ADS (American Depositary Share). That latter figure rose 64% against the 2019 figure.

Yet HUYA stock still looks awfully cheap. It trades at 34 times 2020 earnings.

Huya even has $1.6 billion in cash in the bank, more than 30% of its market capitalization.

There’s a fundamental profile here that makes HUYA stock look like a steal. The question, of course, is why the stock looks so cheap.

Uncertainty

Particularly of late, I’d boil the answer down to one word: uncertainty.

The market often dislikes uncertainty, and Huya has a fair amount of it.

Again, we don’t really know what 2021 is going to look like for this company. China already has returned to normalcy for the most part. Does that mean Huya loses millions of paying users who now have many more options for their time? Or does it mean the company benefits from bringing users on board in 2020 who will remain big fans in 2021?

There’s a merger overhang as well. In October, Huya announced a planned merger with its biggest competitor. But that merger is facing potential regulatory challenges. During the fourth-quarter conference call late last month, Huya didn’t give much of an update; the deal’s fate remains up in the air.

All told, it does seem like investors are taking a “wait and see” attitude toward both 2021 performance and the status of the merger. That’s the opportunity.

Getting In Early

Yes, there’s uncertainty. But where the opportunity lies is in the fact that the uncertainty isn’t over wildly disparate outcomes for Huya and for HUYA stock.

Again, we don’t yet really know what 2021 performance is going to look like. Huya didn’t give much guidance after Q4, saying only that it thought users and revenues would increase this year. Wall Street estimates are all over the place, with per-share earnings projections ranging from 45 cents to $1.05.

But barring absolutely abysmal performance, the exact 2021 results don’t really matter. We know this is a company that has grown for years. And we know it’s a company with significant potential going forward. That’s what matters.

Game streaming isn’t going anywhere. Huya has a big opportunity in e-sports. And there’s plenty of room for margins to improve, as platforms like Huya garner significant amounts of profit off added revenue.

As for the merger, it’s not as if Huya is getting acquired for cash, leaving a binary outcome of either a big gain to the takeover price or a big fall back to pre-deal levels. By both valuation and revenue, Huya actually is the larger of the two companies.

And it’s not as if the market thought the deal was transformative: HUYA stock actually fell 11% when it was announced, and another 3% over the next three trading sessions.

At 34x last year’s earnings, there’s room in the valuation for uncertainty now. Six months or a year from now, we’ll know where the merger stands, and we’ll have a better handle on 2021 performance.

That’s when some investors will look to buy HUYA stock. There’s likely upside in getting there first.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.


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