DouYu Stock: Mixed 2023 Outlook (NASDAQ:DOYU)

Elevator Pitch

I rate DouYu International Holdings Limited’s (NASDAQ:DOYU) shares as a Hold.

I analyzed DouYu’s financial results for the third quarter of last year and DOYU stock’s valuations with my prior article published on November 24, 2022. In this latest update, I touch on DouYu’s 2023 financial outlook and come to the conclusion that DOYU is still a Hold after evaluating the company’s revenue growth and profitability expectations in the current year.

Revenue Weakness

The sell-side analysts estimate that DouYu’s topline will decrease by -6.1% from RMB7,193 million for fiscal 2022 to RMB6,753 million in FY 2023 as per S&P Capital IQ’s consensus data. While this will represent an improvement as compared to the expected -21.5% drop in revenue for DOYU in 2022, it is disappointing that DouYu isn’t likely to witness positive topline expansion this year even though China has moved away from its long-standing COVID-zero policy.

Moreover, DOYU had achieved an impressive +31.8% revenue growth (in RMB terms) in FY 2020, and its FY 2021 topline decline was much more modest at -4.5% as compared to the consensus FY 2023 topline contraction.

It is also noteworthy that the analysts have become increasingly bearish about DOYU’s 2023 revenue outlook. At the end of October 2022, the sell-side was forecasting a topline of RMB7,164 million for DouYu in 2023 according to S&P Capital IQ data. In other words, the sell-side analysts had cut DOYU’s 2023 revenue projection by a significant -6% in the last three months.

There are two key factors that explain why DouYu’s revenue will remain weak in the current year.

The first factor is regulatory headwinds. China’s regulators began cracking down on the Chinese live-streaming industry in the middle of last year, which include measures to prevent minors from offering tips or gifts to live streamers in the country. This means that DouYu is most probably going to see a substantial YoY fall in its topline for the first half of 2023, as the company’s 1H 2022 financial performance wasn’t negatively impacted by new rules on live-streaming yet.

The second factor is that DOYU is in the process of a transition. At the company’s Q3 2022 earnings briefing on November 21, 2022, DouYu stressed that it “will continue to explore new business models” and “gradually improve revenue quality.”

But there are no quick fixes to deal with the regulatory headwinds for the Chinese live-streaming industry, and this is reflected in DOYU’s most recent quarterly metrics. DouYu’s ARPU (Average Revenue Per User) increased by +3.9% YoY from RMB307 in Q3 2021 to RMB319 for Q3 2022, as DOYU’s efforts to place a stronger emphasis on high-ROI (Return On Investment) users paid off. However, this improvement in ARPU came at the expense of a -7.7% YoY decrease in DOYU’s monthly active users or MAUs from 61.9 million to 57.1 million over the same period. DouYu will require much more time to strike a balance between user growth and ARPU expansion, as it optimizes its revenue.

In summary, I agree with the sell-side analysts that DOYU will struggle to register positive revenue growth in 2023.

Profitability Improvement

The consensus financial figures taken from S&P Capital IQ indicate that the sell-side expects DOYU’s non-GAAP adjusted earnings per share or EPS to jump by +179.8% from RMB0.09 for the previous fiscal year to RMB0.26 in the current year.

The market also sees DouYu’s GAAP net loss narrowing from -RMB0.32 per share in FY 2022 to -RMB0.10 per share for FY 2023. At the beginning of November 2022, analysts were projecting a much wider fiscal 2023 GAAP net loss per share of -RMB0.49 for DOYU.

A key driver of expectations for lower expenses and improved profitability in 2023 is a change in the way DouYu acquires content.

When the Chinese live-streaming industry was booming and free of regulatory headwinds in the past, DOYU and its peers were naturally more willing to pay up for expensive, third-party content to boost user growth. Now, content cost has become a key performance indicator for the company, and DOYU has a greater focus on generating inexpensive in-house content with the aim of lowering content-related expenses.

DouYu is taking a much more cautious stance with respect to acquiring third-party licensed content currently. DOYU mentioned at its most recent quarterly results call that it has adopted a “selective copyright procurement strategy” and noted that it avoids “acquiring overpriced copyrighted content.”

In a nutshell, a meaningful improvement in DouYu’s profitability is expected for this year. DOYU has tweaked its approach towards acquiring content, and this should pay off in the form of lower content-related expenses.

Concluding Thoughts

DouYu is deserving of a Hold investment rating. The market currently values DOYU at 0.51 times consensus forward the next twelve months’ price-to-sales according to S&P Capital IQ data. DouYu used to trade at price-to-sales valuation multiples in the 1.5-3.3 times range in 2020. The expected improvement in DOYU’s profitability is a positive factor, but it will be tough for DouYu to command a higher price-to-sales multiple when its revenue growth prospects are lackluster. DOYU’s topline expanded by +31.8% in FY 2020, but the consensus FY 2023 and FY 2024 revenue growth estimates for the company are -6.1% and +3.0%, respectively.