YY - JOYY: Evaluating The Positives And Negatives With Shopline

Summary

• With e-commerce company Shopline's numbers expected to be consolidated with that of JOYY in Q4 2022, I have a favorable view of YY's future top line growth prospects.
• However, Shopline is still unprofitable like most e-commerce businesses, and this will depress JOYY's overall profitability.
• A Hold rating for YY stock is justified on the basis that the company is in transition mode now, as it seeks a new growth direction with Shopline.

Elevator Pitch

I assign a Hold investment rating to JOYY Inc.'s ( YY ) stock.

I like the fact that e-commerce business Shopline will extend YY's long-term revenue growth runway in a meaningful manner. On the flip side, it is inevitable that Shopline's losses will lead to margin compression for JOYY. After considering the positives and negatives linked to its new growth driver, Shopline, I choose to have a Hold rating for YY.

Company Description

As per JOYY's FY 2021 20-F filing , YY describes itself as a company which runs "leading global online social entertainment platforms." In its media releases , JOYY noted that its key platforms included "Bigo Live for live streaming, Likee for short-form videos," and "Hago for multiplayer social networking."

YY's main Bigo business segment, which comprises mainly of the Bigo Live live streaming operations, is JOYY's biggest revenue contributor accounting for approximately 82% of the company's top line for the recent Q3 2022 financial period.

It would be reasonable to refer to Bigo Live as a leading live streaming platform which is at the mature stage of growth. In YY's investor presentation , JOYY revealed that Bigo Live had 35 million monthly active users or MAUs in the third quarter of 2022 with a presence in more than 150 markets around the world.

Shopline Offers A New Growth Angle For YY

On August 22, 2022, JOYY disclosed in a 6-K filing highlighting that its 100%-owned subsidiary, Duowan Entertainment, will invest roughly $183 million in the preferred shares of an e-commerce company known as Shopline. Following the conclusion of this transaction (that is expected to happen in Q4 2022), "the financial results of Shopline will be consolidated by JOYY" as indicated in YY's late-August 2022 6-K filing.

On its website , Shopline calls itself "Asia's biggest smart commerce platform" which has assisted as many as "500,000 merchants to open their online stores" since the company's inception in 2013.

In the intermediate to long term, the addition of Shopline will allow YY to capitalize on growth opportunities associated with the cross-border e-commerce market. According to a recent February 9, 2023 article written by Meta Platforms ( META ) Asia Pacific vice-president Dan Neary, the size of the worldwide cross-border e-commerce market is projected to expand by a +19% CAGR between 2019 and 2026 to $2.2 trillion.

JOYY's Q4 2022 And 2023 Consensus Numbers

YY hasn't officially announced the company's Q4 2022 earnings announcement date, but JOYY is likely to report its most recent quarterly results in the middle of March 2023 based on its prior financial performance disclosures.

JOYY sees itself registering revenue of $606.5 million for the final quarter of the prior year based on the mid-point of its financial guidance outlined in its Q3 2022 earnings press release . The sell-side analysts don't disagree with YY's management guidance, considering that the current Q4 2022 consensus top line for the company is just slightly lower at $605.2 million as per S&P Capital IQ data.

In other words, both the revenue guidance and the sell-side's consensus financial figures point to roughly a -9% top line contraction for JOYY in the fourth quarter of 2022, even after including the expected revenue contribution from Shopline.

Revenue for YY's Bigo segment decreased by -15% YoY and -4% QoQ to $483 million in Q3 2022. Total paying users and mean revenue on a per paying user basis decreased by -0.5% YoY and -16% YoY to 1.51 million and $259.8, respectively for the third quarter of the previous year. At the company's third quarter results briefing , JOYY highlighted that "inflation" and "reopening trends post lifting of travel restrictions" have been a drag on the performance of the company's core Bigo business segment. These negative short term trends could possibly persist for some time, and this view is validated by expectations of another revenue decline for YY on a YoY basis in Q4 2022.

Separately, the analysts forecast that JOYY's normalized earnings per share or EPS will drop significantly from $1.15 in Q4 2021 and $0.96 in Q3 2022 to $0.29 for Q4 2022 as per S&P Capital IQ data. This is because YY's bottom line for Q4 2022 will take a substantial hit from the consolidation of Shopline's financial numbers, as Shopline is loss-making unlike JOYY's existing core business such as Bigo Live.

Moving beyond Q4 2022, the sell-side predicts that JOYY will turn around from a -7% decrease in its revenue for fiscal 2022 to record a +3% growth in its top line in FY 2023. But the analysts' consensus estimates suggest that YY's normalized EPS growth will moderate substantially from +59% in FY 2022 to just +3% for FY 2023.

There are two key takeaways relating to the analysis of YY's consensus financial figures.

Firstly, the revenue growth outlook for JOYY's Bigo business is unfavorable, as it faces both cyclical (inflationary pressures and unwinding of prior Work-From-Home tailwinds) and structural (mature business whose growth prospects will be more modest going forward) challenges.

Secondly, Shopline is the new growth driver that YY needs, but this will come at a price in the near term. JOYY can expect to see faster revenue growth in the quarters and years ahead thanks to Shopline, but Shopline's losses will impact the company's overall profitability in a negative way.

Closing Thoughts

A Hold rating for JOYY is appropriate.

It is difficult to judge if YY can build a new growth pillar with the inclusion of Shopline at this point in time. When JOYY announces its Q4 2022 and full-year FY 2022 results in mid-March, it would be reasonable to expect YY to provide more detailed historical data and forward-looking guidance for Shopline.

JOYY is in the process of transition; it needs to drive faster growth at Shopline to make up for the slower growth of Bigo. In addition, there is still more information (likely to be shared by the company in mid-March) needed to perform an in-depth analysis of Shopline. Therefore, YY is deserving of a Neutral or Hold rating now.

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