Primary image referred from ft.com
On Monday evening, after the close of trading, Yalla Group (NYSE:YALA) released its unaudited financial results for the second quarter ended June 30, and they didn’t disappoint. Yalla, a leading voice-centric social networking and entertainment platform in the Middle East and North Africa, reported an improvement in fundamental data across the board as it looks to refine its portfolio and grow its offering.
The firm operates two flagship mobile applications, Yalla, a voice-centric group chat platform, and Yalla Ludo, a casual gaming application featuring online versions of board games.
The UAE-based entertainment company was listed on the US stock exchange in late 2020 and the share price soared amid the unique market conditions and in light of some fairly exceptional growth figures. The share price rose from around $7 a share in late 2020, to nearly $40 a share in February 2021. However, it came crashing down as the firm missed analysts’ forecasts in Q2 of 2021. Currently, the stock is trading for around $4.50 a share. And I think that’s great value.
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In fact, I believe Yalla Group is among the most undervalued stocks on the US exchange, and there are several metrics to support this. I also think there are several fundamental signs that this stock is about to take off and that’s why I’ve been keeping a close eye on it.
Forecast-beating performance
Investors had been concerned about the company’s ability to keep delivering growth after revenue stagnated between Q2 of 2021 and Q1 of 2022. However, the last two quarters have reinforced Yalla’s capacity to continue growing its operations while expanding its revenue.
Revenue for the quarter ending June 30 came in at $76.1 million versus the consensus estimate of $70.34 million, and above the $72.3 million achieved in the three months until the end of March. This was reflected in profitability. Net income was $20.4 million in the second quarter of 2022, compared with $18.4 million in the second quarter of 2021. As a result, earnings per share (EPS) came in at $0.16, $0.02 better than analyst estimates of $0.14.
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Revenues generated from chatting services were $52.7 million, while revenues from gaming accounted for $23.3 million.
Net margin was 26.7% during the quarter, representing a fall from 2021 when the net margin was 30.2%, although this largely reflects higher costs and continued investment in growth and the refining of its platforms.
Revenue and profit can be seen plotted on the charts below.
One particular positive is the net growth in users. Average Monthly Active Users (MAUs) increased by 35.6% to 29.9 million in the second quarter of 2022. During the second quarter of 2021, there were only 22.1 million MAUs. The growth in MAUs is an important factor impacting Yalla’s capacity to generate advertising revenue. “The increase [in revenue] was primarily driven by the broadening of our user base and our enhanced monetization capability,” the firm highlighted in its report.
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Equally impressive was the growth in paying users. Paying MAUs increased by 65.3% to 10.6 million in the second quarter of 2022 from 6.4 million during the same period in 2021. The ratio of paying users to non-paying users now stands at an impressive 35.4%. To me, this suggests that the platform is able to generate a considerable level of engagement with its users. In the previous quarter, Yalla’s Ludo offering had been highlighted as the main growth driver.
Meanwhile, total costs have increased in line with revenue generation. In Q2, total costs and expenses reached $55.2 million, up from $47.8 million in the second quarter of 2021. The firm stated that the cost of revenues was $29.3 million in Q2, a 23.0% increase from $23.8 million in the same period last year.
Management cited technical service fees resulting from the expansion of the product portfolio and an increase in salaries due to the expansion of its operation and maintenance team. The cost of revenues as a percentage of total revenues increased to 38.5%, up from 35.7% a year ago.
An industry-beating valuation
By many metrics, Yalla looks like a good buy. It has a price-to-earnings ratio of 10.2, and that’s impressive for a company demonstrating this level of year-on-year growth. According to Seeking Alpha data, the stock trades at a 40.4% discount versus other companies operating in the social media and entertainment space. It is especially cheap when we consider that other, more expensive, companies in this sector, such as Twitter (NYSE:TWTR), are not growing revenue at the same rate.
In fact, Twitter doesn’t even have a price-to-earnings ratio as it still spends more than it earns. Yalla’s forward price-to-earnings ratio, based on projected income for the financial year, is 10, but this may change if Yalla continues to surpass expectations.
Yalla’s valuation is actually very attractive according to several metrics. It’s enterprise value-to-sales ratio sits at 1.1 versus Twitter’s 6.4. Collectively, these metrics infer that Yalla is an undervalued and underappreciated stock.
Sound growth prospects and healthy cash reserves
It’s important to note that Yalla’s current growth is coming during a period of economic hardship for many, and in many cases, that would cause revenues to go into reverse. This is perhaps reflected in the cautious estimates given by management for Q3 – the firm currently expects revenues to be between $70 million and $75 million, although this could change. Nevertheless, Q3 revenue will likely reflect growth on that achieved Q3 of 2021.
It’s also worth highlighting that Yalla is now delivering growth in a post-pandemic environment. The company’s initial growth was partially down to the impact of Covid-19-induced lockdowns and that time when shops were closed, and people were confined to their homes. But that’s not the case anymore. Yalla’s growth is coming in spite of an ever-improving environment for socializing and entertainment.
As noted by Yang Tao, Founder, Chairman and CEO of Yalla, the company is continuing to refine its existing product offering and expand its reach with more recent releases such as Parchis – an app focusing on the South American market. The firm intends to continually enhance its offering in the “more immersive” social experience area, as users seek “metaverse” type interactions with each other.
Another positive is the health of the company’s balance sheet. And it’s a big positive. The cost of growth is increasing substantially as interest rates increase around the world. But that shouldn’t be an issue for Yalla, as the firm has a huge $384 million in cash. And that’s up from $351 million this time last year. So, there’s no borrowing concerns or need to worry about the burn rate, as cash and cash equivalents are actually rising organically.
In fact, total current assets, which includes cash and cash equivalents, is equal to $426 million. It’s worth noting that the market cap is only $200 million greater than total current assets.
Risks
As with any investment, there are always risks. Yalla has some stiff competition in the social media and entertainment space. To date, the UAE-based firm has found a bit of a niche, but there’s nothing to say that established social networking players won’t grow into their area.
Equally, I’m sure investors will want to see continued evidence that the business can grow users and revenues in the post-pandemic world, but I think the evidence so far is pretty impressive. It’s certainly a stock to keep an eye on right now.
Summary
Following Monday’s earning report, Yalla looks like a low-risk growth stock which is dirt cheap right now. The firm has products that are continuing to attract users and generate revenue amid an evolving environment for entertainment, and it has a very healthy pot of cash to fund future growth.
