New Game Launches And AI Streaming Will Drive Future Markets

Key Takeaways

• Strategic transformation and game launches drive growth in game-related services, enhancing revenue diversification and future growth potential.
  
• Enhanced technology use in live streaming and international expansion are set to boost operational efficiency, revenue growth, and shareholder value.
  
• Weak live streaming revenue and rising costs threaten stability, while non-streaming initiatives and reliance on shareholder returns may limit growth and long-term earnings.

Catalysts

Through its subsidiaries, operates game live streaming platforms in the People’s Republic of China.

• Strategic transformation and new game launches have led to significant growth in game-related services, which increased revenues by 145.4% year-over-year, enhancing revenue diversification and future revenue growth potential.
  
• The company's focus on game distribution and collaborations with game developers and publishers is expected to contribute positively to future revenue streams by expanding Huya's role as a primary distribution channel for new games.
  
• The introduction of enhanced technology and product features, including the use of AI to improve live streaming content, is likely to boost operational efficiencies and user engagement, potentially improving net margins.
  
• Growing international business presence and expansion into overseas markets through diverse revenue streams, such as game marketing services, are anticipated to drive revenue growth and earnings.
  
• The company's shareholder return strategy, including dividends and share repurchase programs, is set to optimize capital structure and improve cash utilization, potentially enhancing earnings per share and shareholder value.

HUYA Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HUYA's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.8% today to 7.0% in 3 years time.
• Analysts expect earnings to reach CN¥477.4 million (and earnings per share of CN¥2.06) by about May 2028, up from CN¥-48.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥548 million in earnings, and the most bearish expecting CN¥406.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.7x on those 2028 earnings, up from -131.9x today. This future PE is lower than the current PE for the US Entertainment industry at 23.2x.
• Analysts expect the number of shares outstanding to decline by 1.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.35%, as per the Simply Wall St company report.

HUYA Future Earnings Per Share Growth

Risks

• The company's live streaming revenue, a primary source of income, remains weak due to macroeconomic pressures and reduced user spending on gifting, threatening overall revenue stability.
  
• Despite improvements in profitability, Huya's strategic transformation and commercialization efforts emphasize non-live streaming sources, which may not fully offset the seasonal and ongoing industry challenges seen in live streaming revenue.
  
• There is a risk associated with operational costs, particularly around licensing fees for eSports events and streamer costs, which could impact net margins if not effectively managed.
  
• Future shareholder returns are heavily reliant on dividend payouts and share repurchases, which may reduce capital available for growth and investment in new ventures, potentially constraining long-term earnings.
  
• The competitive landscape in content distribution and emerging AI technologies may pose execution risks that could affect Huya's ability to capture or sustain market share, impacting long-term revenue and profit growth potential.

Valuation

• The analysts have a consensus price target of $4.505 for HUYA based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $6.51, and the most bearish reporting a price target of just $3.57.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥6.8 billion, earnings will come to CN¥477.4 million, and it would be trading on a PE ratio of 19.7x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of $3.82, the analyst price target of $4.5 is 15.2% higher.
  
• 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.