Marko Geber
Elevator Pitch
I award a Hold investment rating to DouYu International Holdings Limited’s (NASDAQ:DOYU) stock. DOYU’s forward price-to-sales valuation multiple is very low, but I am of the view that this is fair considering the company’s financial outlook and its delisting risk. Also, DOYU’s near-term revenue should continue to be lackluster in view of regulatory and macroeconomic challenges. After considering these factors, my opinion is that DOYU’s shares warrant a Hold rating.
Company Profile
DOYU refers to itself as the operator of “a leading game-centric live streaming platform in China” in its press releases. DouYu’s shares were listed on Nasdaq since July 2019, and Chinese internet giant, Tencent Holdings Limited (OTCPK:TCEHY) (OTCPK:TCTZF) has a 38% equity interest in DOYU.
According to its fiscal 2021 10-K filing, DouYu generated approximately 94% of its revenue for the most recent fiscal year from livestreaming. Advertisements and other revenue contributed the remaining 6% of DOYU’s top line for FY 2021.
Earnings Beat Was Driven By Lower Costs Rather Than Revenue Growth
DouYu released the company’s financial results for the third quarter of the year on November 21, 2022 before trading hours, and its actual Q3 2022 earnings came in above the market’s expectations.
In USD terms, DOYU achieved a positive non-GAAP adjusted earnings per share or EPS of +$0.01 for Q3 2022, when the sell-side analysts were anticipating a non-GAAP adjusted net loss per share of -$0.01. In domestic currency terms, DouYu turned around from a non-GAAP net loss of -RMB73 million for Q3 2021 to generate an adjusted net profit of RMB26 million in the recent quarter.
But DouYu’s Q3 2022 earnings beat was attributable to expense optimization, instead of revenue expansion.
In fact, DOYU’s top line declined by -2% QoQ and -23% YoY to RMB1,798 million in the third quarter of the current year. The company’s number of paying users decreased by -15% QoQ and -22% YoY to approximately 5.6 million for the third quarter of this year, and this was -11% below the sell-side analysts’ consensus paying user estimate of around 6.3 million as per S&P Capital IQ.
Instead, it was DOYU’s profitability improvement in the most recent quarter that surprised the market in a positive manner.
According to financial data obtained from S&P Capital IQ, the sell-side had expected DouYu’s gross profit margin to contract by -130 basis points YoY in the third quarter, but DOYU’s gross profit margin actually expanded by +30 basis points YoY for Q3 2022. Similarly, DouYu delivered a +120 basis points expansion in its non-GAAP adjusted operating profit margin for Q3, when analysts had forecasted a -50 basis points contraction in its non-GAAP operating margin in the recent quarter.
Specifically, DOYU’s G&A (General and Administrative) costs and R&D (Research and Development) expenses decreased by -40% YoY and -32% YoY to RMB52 million and RMB84 million, respectively for the third quarter of 2022. At the company’s Q3 2022 earnings briefing, DouYu attributed the better-than-expected profitability and lower expenses for the recent quarter to “effective cost and expense controls.”
DOYU’s Cheap Valuations Are Justified
DouYu currently trades at 0.39 times consensus forward next twelve months’ price-to-sales as per S&P Capital IQ valuation data. DOYU used to be valued by the market at a historical peak forward price-to-sales valuation multiple of 3.5 times in February 2021.
On the surface, DOYU’s shares appear to be undervalued. However, I think that DouYu’s stock does deserve a significant valuation discount in view of a number of factors.
Firstly, the revenue outlook for DOYU isn’t encouraging. Based on consensus data sourced from S&P Capital IQ, DouYu’s YoY revenue decline is expected to widen from -4.5% for FY 2021 to -21.5% in FY 2022. Analysts also don’t see DOYU returning to positive top line growth next year, with the consensus FY 2023 revenue growth forecast for the company at -6.8%. The consensus financial projections seem reasonable, taking into account the weak Chinese economy (this affects the willingness of livestream viewers to spend on gifts) and regulatory headwinds (Chinese regulators have their eyes on the livestreaming sector).
Secondly, this is a market environment which doesn’t favor loss-making companies. DOYU isn’t expected to be even profitable at the EBITDA level by fiscal 2024 (source: S&P Capital IQ), as far as the sell-side consensus estimates go. Notably, DouYu seems to be still at the stage of investing heavily for future growth. DOYU stressed at the company’s most recent quarterly results call that “we will continue to increase our investment in high quality self-produced content.”
Thirdly, DouYu faces a relatively higher risk of delisting as compared to some of its other US-listed Chinese peers which have already completed listings on other stock exchanges (e.g. the Hong Kong stock exchange). As it stands now, DOYU’s shares are solely listed in the US, and the company hasn’t indicated an intention to seek listings elsewhere.
Closing Thoughts
A Hold investment rating for DOYU is fair and appropriate. DouYu’s shares seem to be cheap based on the forward price-to-sales valuation metrics, but I think this is justified taking into account a couple of factors highlighted earlier in this article. Moreover, DOYU’s above-expectations third-quarter earnings were the result of lower-than-expected expenses, rather than revenue expansion (which will be indicative of a higher-quality earnings beat).
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