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Stocks  | March 31, 2019

There are two ways to view Huya’s (NYSE:HUYA) recent stock performance. On the one hand, if you bought HUYA stock last summer, things are still looking rather sour (Huya’s stock is down near-50% from its 2018 high).

On the other hand, if you bought at the beginning of the year when the market was at peak pessimism, you are already up a cool 74% year-to-date.

What explains Huya’s incredible volatility? And can the stock’s exhilarating gains continue? Let’s take a closer look at the business and what makes HUYA stock stand out compared to its Chinese streaming video peers.

Huya’s Mission: Connecting Gamers

A lot of people like to trade Chinese stocks based on momentum, social media gossip, and other such transitory factors. But it can be helpful to take a closer look at the underlying business associated with the ticker symbol. What makes Huya’s business unique? Earlier this month, Huya CEO Rongjie Dong participated in the company’s first U.S. media event since last year’s IPO. Dong described how Huya found its core business:

“When League of Legends was all the rage back in 2013 and 2014, users wanted to know why some users excelled and some did not. We spotted the rise in demand by then and developed a business model with which users can watch game streamers play and communicate with them.”

When asked about the company’s sustainable competitive advantage, Dong replied that:

“The two important indicators for the competitiveness of content companies are firstly, consistently outputting good contents and secondly, constantly producing more and more good content. The point is how to attract and retain the creators who produce high-quality content to stay on our platform instead of other platforms.”

As we’ve seen with Youtube (NASDAQ:GOOG, NASDAQ:GOOGL) and other streaming platforms, the owners can lose a ton of goodwill if they don’t treat their content creators well.

Considering the hugely competitive landscape in China, much more so than the U.S., it’s important the Huya is focused here. Additionally, Huya has spent heavily on infrastructure so its live streams of gaming matches arrive faster than the competitions’.

Huya’s Remarkable Growth

American investors have taken a liking to Chinese streaming video plays. Momo(NASDAQ:MOMO), IQIYI (NASDAQ:IQ), Huya and others have all been hot stocks over the past year.

Of those three, however, Huya has been leading the way. Over the past six months, HUYA stock has posted a 14% gain, compared to 15% and 18% losses for Momo and IQIYI, respectively. Year to date, HUYA stock is leading the way, up 74%. MOMO stock is up 58% and IQ stock is up 53%. All have been fine performers, but Huya has been the winner.

To understand why, look at revenue growth. Huya managed an absurdly good 103% revenue growth rate last quarter. Momo and IQIYI were no slouches, either, with 50% and 45% revenue growth for their quarters. But Huya is operating on a different level entirely. It’s also worth considering that Huya is delivering huge ARPU growth, as its user base was up around 40% yet it managed to more than double revenues.

A big part of that came because Huya has been able to convert free users to premium paying members. Huya’s premium base grew more than 70% to almost 5 million users. As we’ve seen with Spotify (NYSE:SPOT), it’s pivotal for these sorts of services to be able to up-sell free ad-driven users to subscription recurring revenues if you want to deliver consistent profits.

Huya’s Economics: Pretty Good

Streaming audio and video companies have notoriously struggled to make money. Even the undisputed global champion, Netflix (NASDAQ:NFLX), took many years to become consistently profitable and still trades at a sky-high P/E ratio. Investors in this space are willing to grant companies a lot of time to build out their user base before turning on the profit spigot.

That’s what makes HUYA stock even more impressive. Huya is still in its early years. Just look at that 103% revenue growth rate if you need further evidence of the untapped potential still in play in here. Despite that, Huya is already turning out decent positive EPS. Last quarter alone, it earned 11 cents per share.

That was way ahead of the Street’s 5 cent estimate. Momo, it’s worth noting, is also quite profitable. However, it’s much larger and more mature overall. Huya, by contrast, seemingly has a higher growth ceiling. IQIYI, for what it’s worth, has higher content costs and, as a result, is not expected to become profitable anytime soon.

HUYA Stock Verdict

HUYA stock got dumped during the rush out of any and all Chinese equities late last year. Even businesses such as the streaming video players, which have nothing to do with international trade, got dragged down by the tariff wars. Investors have woken up to the growth in these names, however, and powered the sector right back up to start 2019.

This makes it tough to offer a straight buy or sell call. I hate chasing momentum trades after they’ve already made huge moves. That said, Huya’s business is absolutely booming.

All signs point to HUYA stock trading higher by the end of the year. However, the stock is up 74% in three months. HUYA stock looks great on fundamentals, but wait for some sort of dip or correction to get in.

Or, alternatively, consider selling puts on HUYA stock to either earn income or get a long position established at a better price.

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