YALA - Yalla Group Grows Revenue And Profits As It Launches New Games

2023-08-16 13:54:54 ET

Summary

• Yalla Group Limited reported Q2 2023 financial results, missing consensus revenue estimates.
• The company operates a voice-centric social networking and entertainment service in the Middle East and North Africa regions.
• Based on my discounted cash flow calculation, the stock may be undervalued, and I reiterate a Buy outlook at around $5.20.

A Quick Take On Yalla Group

Yalla Group Limited (YALA) reported its Q2 2023 financial results on August 14, 2022, missing consensus revenue estimates.

The firm operates a voice-centric social networking and entertainment service that covers the Middle East and Northern Africa regions.

I previously wrote about Yalla with a Buy outlook as the company was expanding its offerings.

Based on my discounted cash flow calculation, YALA stock may be undervalued at its current level, so my outlook remains a Buy, at around $5.20.

Yalla Overview And Market

Dubai, United Arab Emirates-based Yalla was founded to develop an online social media service focused on the Middle East and North Africa [MENA] region that is built on voice communication rather than just written texting.

Management is headed by founder, Chairman and CEO Mr. Tao Yang, who was previously manager of ZICT Technology Co and vice president of Beijing Feinno Communication Technology.

The company’s primary offerings include:

• Voice Chat

• Social Network

• Entertainment

• Online Games

• Gift Exchange.

The firm provides its app to users through major mobile platform operators such as Apple (AAPL) and Google (GOOG) (GOOGL).

Management believes there is a "significant imbalance between the supply of, and demand for, online social networking and entertainment options in MENA."

According to a 2019 market research report by Wamda, Crowd Analyzer, along with Hootsuite and APCO Worldwide, issued a report that analyzed over 172 million social media interactions and concluded that MENA social media users are "becoming more active and engaged online where conversations are taking place about brands, business and services alongside fashion, politics and religion."

User bases have shown growth on nearly every social media platform and that growth has been driven primarily by Generation X persons.

Notably, Saudi Arabia registered a social media penetration rate of 75%; in Egypt, users were interested in a "much broader variety of topics, including politics, religion, sports and social development."

Major competitive or other industry participants include:

• Meta Platforms (META)

• TikTok

• Twitter

• Snapchat (SNAP)

• Other social media-enabled services.

Yalla’s Recent Financial Trends

• Total revenue by quarter has risen per the following chart; Operating income by quarter has fluctuated without a discernible upward trend over the last two years.

• Gross profit margin by quarter has varied within a range; Selling, G&A expenses as a percentage of total revenue by quarter have trended higher in recent quarters, indicating slightly reduced efficiency in this regard.

• Earnings per share (Diluted) have moved higher in its most recent quarters, as the chart shows here.

(All data in the above charts is GAAP.)

In the past 12 months, YALA’s stock price has risen 18.14% vs. that of the iShares Expanded Tech-Software Sector ETF’s (IGV) 7.95%, as the chart indicates below:

For the balance sheet , the firm ended the quarter with $510.5 million in cash, equivalents and short-term investments and no debt.

For the twelve months ended December 31, 2022, the company generated free cash flow of $104.5 million, during which capital expenditures were $15.0 million. The company paid $26.7 million in stock-based compensation during calendar year 2022, the most recent period we have published results.

Valuation And Other Metrics For Yalla Group

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming generous DCF parameters, the firm’s shares would be valued at approximately $7.85 versus the current price of $5.21, indicating they are potentially currently undervalued, with the given earnings, growth, and discount rate assumptions of the DCF.

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

YALA’s most recent unadjusted Rule of 40 calculation was 35.4% as of Q2 2023’s results, so the firm has declined somewhat since Q3 2022 in this regard, per the table below:

(Source - Seeking Alpha.)

Commentary On Yalla Group Limited

In its last earnings call ( Source - Seeking Alpha ), covering Q2 2023’s results , management highlighted above-guidance revenue growth, despite the impact of the Ramadan holiday.

The firm is seeing "rapid digital transformation in the Middle East," and leadership believes it is well-positioned to capitalize on the growing demand for social media and gaming services in the MENA region.

Management recently launched its new game Merge Kingdoms across the Middle East, and said it was the number two downloaded game in Saudi Arabia after its launch. It plans to ramp up promotional spending for the game to drive user acquisition.

Yalla is also planning to expand its pipeline of games in the mid-core and hard-core game categories.

YallaChat is also a focus for further investment as the company seeks to refine the product after initial usage.

The company’s paying ratio dropped from 41% to 39% sequentially, but management said that is still higher than it sees in other comparables.

Total revenue for Q2 2023 rose 4.1% year-over-year and gross profit margin increased by 2.8%.

Selling, G&A expenses as a percentage of revenue grew by 1.8% YoY indicating reduced efficiency, but operating income increased by 14.4%.

The company's financial position is solid, with plenty of liquidity and no debt.

YALA’s Rule of 40 performance has been moderate and has dropped somewhat from Q2 2023’s results.

Looking ahead, consensus estimates for 2023 revenue indicate an expected growth rate of 3.9%.

If achieved, this would represent a drop in revenue growth versus 2022’s growth rate of 11.17% over 2021, indicating a slowing growth rate.

Analysts questioned company leadership about large Internet company interest in the MENA region and management responded that it is being invited to conversations with major players, with the potential for both collaboration and competition.

Regarding valuation, in the past twelve months, the firm's EV/EBITDA valuation multiple has risen 24.3%, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include faster growth for its new game Merge Kingdoms, as the company promotes it internally to all its users.

The company could also be a potential takeover target for a larger company seeking to gain a foothold in the region.

Business risks to the company’s outlook include the potential for competitor entrance into the social gaming market as well as the need for further marketing investment in its new products.

Based on my discounted cash flow calculation, Yalla Group Limited stock may be undervalued at its current level, so my outlook is a Buy at around $5.20.

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