JOYY Stock: Pros And Cons Of Investing Now

seekingalpha04-10

The unfavorable factors for JOYY Inc. include the risk of profit margin compression this year and the termination of the YY Live divestment transaction.JOYY Inc.'s key positives relate to the high ...

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href=https://seekingalpha.com/article/4682966-joyy-stock-pros-and-cons-of-investing-now><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The unfavorable factors for JOYY Inc. include the risk of profit margin compression this year and the termination of the YY Live divestment transaction.JOYY Inc.'s key positives relate to the high ...</p>\n\n<a href=\"https://seekingalpha.com/article/4682966-joyy-stock-pros-and-cons-of-investing-now\">Source 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MTStock Studio Elevator Pitch I have a Hold investment rating for JOYY Inc. (NASDAQ:YY) stock. My previous write-up published on December 9, 2023, looked at the company's Q4 2023 revenue guidance and the extension of the expiry date for its share repurchase program. In the current update, I outline the major positives and negatives for YY shares now. On one hand, YY might execute on more share repurchases in the near term, and it could achieve positive revenue expansion again this year. On the other hand, it is likely that JOYY will record weaker profitability in 2024, and there are question marks regarding the company's proposed sale of its Mainland Chinese live-streaming arm, YY Live. As such, there are both pros and cons associated with a potential investment in YY stock, which translates into a Hold rating. Profitability Outlook YY's most recent quarterly report for Q4 2023 bottom line surpassed expectations, but I think that there is a risk of JOYY's actual profitability or earnings for this year missing consensus estimates. As indicated in its latest quarterly results release, the company's net profit attributable to shareholders rose by +28% YoY to $64.2 million in Q4 2023, which was +23% better than the consensus bottom-line forecast of $52 million (source: S&P Capital IQ). JOYY's operating costs decreased by -14% YoY for the fourth quarter, which was a key contributor to the company's earnings beat. At its Q4 2023 results briefing, YY attributed the lower expenses for the recent quarter to \"the optimization of overall sales and marketing strategies\" to \"be more focused on ROI (Return On Investment) and effectiveness of user acquisition.\" But there are signs suggesting that JOYY's profit margins could be lower in 2024 vis-à-vis 2023. Firstly, YY indicated at the company's Q4 2023 earnings call that it expects to \"reinvest some of our operating profits into operational activities that can drive further revenue growth.\" A potential increase in investments will naturally translate into higher expenses. Secondly, JOYY's \"new (e-commerce) business, Shopline\" which \"remains loss making and burns cash,\" is anticipated to \"take time to grow\" as per BofA's (BAC) research cited in a March 25, 2024, Seeking Alpha News article. It seems that YY's Shopline business won't reach the scale required to be profitable (via positive operating leverage) anytime soon. Thirdly, the analysts see JOYY's normalized net margin contracting by -1.3 percentage points to 11.6% for full-year fiscal 2024, as per S&P Capital IQ's consensus data. The company shared at its most recent quarterly results briefing the intention to \"strike a balance between profit and growth.\" These comments imply that JOYY could potentially trade off lower margins for top-line expansion this year by allocating capital to reinvestment and the new Shopline business. YY Live Deal In my prior September 29, 2023, article, I highlighted that there was regulatory uncertainty relating to JOYY's \"$3.6 billion sale of its China livestreaming business YY Live to Baidu (BIDU)\" that was proposed in 2021. At the beginning of this year, YY disclosed that it was notified of BIDU's intention to walk away from the planned acquisition of YY Live. At the company's fourth quarter earnings briefing, JOYY could only reveal that it is \"currently in discussion with Baidu on the next steps following the termination of the SPA (Share Purchase Agreement)\" for YY Live. The failure to secure \"regulatory approvals\" for the YY Live transaction was likely the main reason for Baidu's decision, as reported by Seeking Alpha News on January 2, 2024. YY had cash and investments amounting to $3,685.6 million on its balance sheet as at the end of 2023, of which $2.0 billion is attributable to the divestment proceeds associated with the YY Live business disposal. JOYY's shares are most probably going to be assigned a hefty valuation discount, if the company can't monetize its domestic live-streaming business as planned. Shareholder Capital Return There is a decent chance that YY will return a larger proportion of excess capital to the company's shareholders via share repurchases this year. JOYY stressed at its most recent quarterly earnings call that \"we expect to continue to execute additional share buybacks and strive to improve our execution consistency in the new year.\" YY's recent actions relating to share repurchases were disappointing. The company didn't buy back any of its own shares in the final quarter of last year. Between the start of this year and mid-March 2024, JOYY allocated $25 million, or just slightly over 1% of its market capitalization, to share buybacks. Looking ahead, JOYY still has around half a billion dollars remaining from its current share buyback authorization that expires in November this year. As such, it will be reasonable to be hopeful that YY could step up on its share repurchases in the coming months, considering its management commentary. Top-Line Prospects JOYY has guided for a top line of $551.5 million for the first quarter of the current year, as per the mid-point of its guidance (source: Q4 earnings call transcript). The new management guidance indicates that the company sees its YoY revenue contraction narrowing from -6.4% in Q1 2023 and -5.8% in Q4 2023 to -5.5% for Q1 2024. At the same time, the sell side analysts are forecasting that YY will register a positive sales growth of +0.5% in full-year FY 2024, after experiencing top-line declines of -7.9% and -6.0% for FY 2022 and FY 2023, respectively. There are good reasons to think that YY can return to positive revenue expansion territory in 2024. One reason is that JOYY is willing to reinvest a portion of its profit in top-line expansion drivers, as per the company's management comments which I cited in an earlier section of this write-up. Another reason is that YY's sales contributed by non-live streaming businesses are growing. Specifically, JOYY's proportion of revenue generated by non-live streaming businesses as a percentage of its aggregate top line increased significantly from 5.4% for 2021 to 12.7% in 2023. YY mentioned at its Q4 2023 results briefing that it had \"made some business upgrades and strategy upgrades to these non-live streaming businesses.\" Therefore, it is realistic to think that JOYY's FY 2024 top-line growth will be boosted by the optimization of its non-live streaming businesses. Final Thoughts  I have a Neutral view of JOYY Inc. stock following a consideration of the key stock price drivers relating to the company, such as its financial outlook and potential corporate actions. A seemingly depressed consensus next twelve months' price-to-revenue multiple of 0.91 times (source: S&P Capital IQ) for JOYY is justified. This considers the company's lackluster consensus FY 2023-2027 revenue CAGR forecast of +4.2% (source: S&P Capital IQ).","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2426277125"}