Is Huya Stock a Buy Now?

Huya (NYSE: HUYA), a leading game-centric, live-streaming platform in China backed by Tencent Holdings (OTC: TCEHY), saw its share price almost double from its March low on the back of the strong recovery in technology stocks. For investors who missed the boat earlier this year, it might not be too late to consider Huya stock now.

Solid execution track record

Founded in 2014 as a business unit within JOYY, Huya was spun off in 2018 and has morphed into a leading video game streaming platform in China with 168.5 million monthly active users (MAU). Revenue surged more than tenfold over the last three years to $1.15 billion in 2019, making it the largest live-streaming platform in China. It also reported its first annual profit of $67.2 million in 2019, thanks to its expanding margins.

These numbers indicate that Huya is capable of growing quickly and profitably. The latter also validates the potential behind the company's business model, which depends mainly on income from selling virtual goods. Moreover, as Huya continues to grow its business (more on this later), it could leverage its economies of scale to improve its margins. In other words, it could advance net profit at a faster pace than revenue in the future.

Men playing computer games

Data source: Getty Image.

Growth opportunities

Despite its strong track record, there are good reasons to believe that Huya's best days lie ahead.

To start, the esports industry in China is rapidly growing. According to market research firm Frost & Sullivan, China's esports industry could reach 537 million gamers by 2022. That growth benefits the video game streaming market in China, which is projected to grow from $1.2 billion in 2017 to $4.9 billion in 2022 at a compound annual growth rate (CAGR) of 34%, and Huya is one of the biggest players in the space with an estimated market share around 30% to 40%.

Internally, Huya is investing significant resources to grow the quantity and quality of its content offerings. For example, the company has expanded into non-game entertainment content, such as talent shows, anime, outdoor activities, live chats, and more. By diversifying its content, Huya can appeal to new users while improving the engagement level of its existing viewers.

A growing user base, in turn, attracts hosts who produce high-quality content, sparking a virtuous cycle of growth. With improving customer stickiness, Huya can then improve its monetization by growing the total number of paying users -- which stood at 6.2 million, or 3.6% of total MAUs in the latest quarter -- and increasing the average revenue per paying user.

The proposed merger with Douyu

On Oct. 12, Huya announced its plan to acquire its leading competitor, Douyu International (NASDAQ: DOYU). If materialized, the deal will create a streaming giant with more than 300 million combined users and cement Huya's dominance in this market. Tencent, the largest shareholder of both companies, will have a nearly 68% stake in the combined entity.

The deal makes a lot of sense, both financially and strategically. First, the new company will benefit as it streamlines operations across technology, sales and marketing, and administration. There is also the potential for increased revenue if users can access content on both Huya and Douyu's platforms, supporting the long-term goal of growing spending per user. The larger entity should also have greater bargaining power with content creators, which include live-streaming hosts and esports content owners.

Huya was already a fast-growing business with a leading position in the emerging esports market. Supported by the Douyu merger, and the backing of Tencent, the world's largest video game publisher, Huya will control 80% of the game streaming market in China, putting it on a strong growth trajectory.

Investors should consider initiating a small position in Huya stock now and further increase their position after the merger closes.

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Lawrence Nga owns shares of HUYA Inc. The Motley Fool owns shares of and recommends Tencent Holdings. The Motley Fool recommends HUYA Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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