Rising Regulatory Burdens And Fierce Competition Will Erode Value

Key Takeaways

• Increasing regulatory scrutiny and data privacy laws could limit user growth, constrain monetization, and raise compliance costs, compressing margins and eroding competitive advantages.
  
• Rising competition and market saturation threaten user engagement, drive up acquisition costs, and challenge the sustainability of JOYY's revenue and profit models.
  
• Strong growth in advertising and stable livestreaming, combined with AI innovation and global expansion, position the company for sustainable profitability and enhanced shareholder value.

Catalysts

Engages in the provision of social product matrix and communication technology.

• Intensifying global regulatory scrutiny, particularly toward Chinese digital platforms, threatens to impose new restrictions on JOYY's cross-border operations, which could severely constrain both international user growth and regional monetization, ultimately pressuring topline revenue and adding to compliance costs.
  
• Mounting concerns and evolving legislation around data privacy are likely to impose higher compliance burdens on JOYY, severely limiting monetization strategies that depend on leveraging user data, which could compress net margins and erode competitive advantages in advertising algorithms.
  
• User base stagnation and escalating competition from nimble, localized short-video and social platforms are expected to increase customer acquisition costs and reduce user stickiness, driving slower revenue growth and undermining the sustainability of existing earnings.
  
• As the global live-streaming and social entertainment industry matures, market saturation may drive intense pricing pressure and elevated user acquisition expenditures, eroding operating profits and diminishing future cash flows for JOYY.
  
• Growing disintermediation by content creators-who increasingly migrate to platforms that enable direct monetization-threatens to undermine JOYY's revenue-sharing models and reduce overall platform take rates, ultimately diminishing both topline growth and long-term profitability.

JOYY Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on JOYY compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming JOYY's revenue will grow by 3.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 82.3% today to 2.4% in 3 years time.
• The bearish analysts expect earnings to reach $55.7 million (and earnings per share of $1.33) by about September 2028, down from $1.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 36.5x on those 2028 earnings, up from 1.9x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 17.0x.
• Analysts expect the number of shares outstanding to decline by 4.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

JOYY Future Earnings Per Share Growth

Risks

• The company's advertising business, BIGO Ads, is delivering exceptional growth with 29% year-over-year and nearly 9% quarter-over-quarter increases in revenue, now comprising over a quarter of total revenues, which could drive topline growth and increase earnings.
  
• JOYY's livestreaming business has stabilized and is showing sequential recovery in both developed markets and Southeast Asia, with growth in paying users and improvements in operating margins, supporting sustainable profit and cash flow generation.
  
• Continued investment and innovation in AI-driven features for both livestreaming and advertising, such as real-time translation and dynamic content recommendation, are improving user engagement and conversion rates, with potential to drive higher average revenue per user and improved net margins.
  
• The company maintains a strong balance sheet with $3.3 billion in net cash and has consistently returned capital to shareholders through dividends and share buybacks, which may enhance shareholder value and support the share price.
  
• Expansion efforts in North America, Europe, and new verticals, along with synergies across JOYY's ecosystem and scalable tech infrastructure, are establishing a foundation for long-term global growth and profitability, which could contribute to long-term earnings improvements.

Valuation

• The assumed bearish price target for JOYY is $37.18, which represents two standard deviations below the consensus price target of $57.86. This valuation is based on what can be assumed as the expectations of JOYY's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $71.9, and the most bearish reporting a price target of just $35.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.3 billion, earnings will come to $55.7 million, and it would be trading on a PE ratio of 36.5x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $62.96, the bearish analyst price target of $37.18 is 69.3% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.