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Elevator Pitch
I continue to award a Hold rating to JOYY (NASDAQ:YY). In my prior September 29, 2023 update, I assessed YY’s cash pile, shareholder capital return, and financial outlook.
The focus of this latest article is JOYY’s new quarterly top line guidance and the company’s decision to extend the expiry date of its share buyback program. These should be the key considerations for investors thinking of building a position in the stock.
I still have a Neutral view of YY as a potential investment candidate and this implies that JOYY is worthy of a Hold investment rating. The company’s buying back of its own shares will limit the downside for its share price to some extent. However, a meaningful re-rating of JOYY’s stock price and valuation multiples for the near term is unlikely as the company’s sales continue to contract.
JOYY’s Q4 2023 Revenue Guidance Failed To Meet The Market’s Expectations
The company outlined its expectations of achieving revenue of between $551 million and $579 million for the final quarter of this year when it announced its Q3 2023 financial results towards the end of last month.
YY’s shares corrected by -3.3% in the two trading days (on a cumulative basis) following its most recent quarterly earnings release. According to S&P Capital IQ’s consensus data, JOYY’s actual Q3 2023 top line and normalized earnings per share beat the analysts’ consensus estimates by +0.6% and +149.0%, respectively. As such, it is clear that investors are focused on YY’s future financial performance rather than its better-than-expected results for the latest quarter.
JOYY guided for a -6.6% YoY contraction in its top line from $604.9 million in the fourth quarter of 2022 to $565.0 million (mid-point of guidance) for Q4 2023. This is worse than YY’s actual Q3 2023 sales decline of -3.4% in YoY terms. More importantly, the $565.0 million fourth quarter revenue guidance was 6% below the sell side’s consensus top line projection based on S&P Capital IQ data.
At its Q3 2023 earnings call, YY cautioned that “the pace of recovery across different markets will vary and short-term fluctuations in users’ paying sentiment may persist.” In its fiscal 2022 20-F filing, the company disclosed that it generated 35.8% of its revenue last year from “developed countries and regions” such as “the United States of America, the Great Britain, Japan, South Korea and Australia.” For the most recent quarter, JOYY’s businesses in developed markets have performed well, but the company’s business operations in other markets have witnessed a relatively slower recovery. Therefore, it is understandable why JOYY has pretty modest expectations of its near-term top line expansion.
To make things worse, there is a possibility that YY’s actual margins and earnings for the fourth quarter of this year and 2024 could also be disappointing.
JOYY noted at the company’s third quarter results briefing that the company’s “profit potential also depends on the pace of topline recovery” and it also stressed that “we aim to strike a balance between scale and efficiency.” Based on my interpretation of YY’s management commentary, I am of the view that negative operating leverage and the goal of balancing both growth and profitability might pose downside risks for JOYY’s bottom line going forward.
YY Renews Share Repurchase Plan For An Additional Year
Year-to-date, JOYY’s shares have outperformed the Chinese internet sector, and this is largely attributable to the company’s willingness to utilize share buybacks to support its stock price.
In 2023 thus far, YY’s share price rose by +7.4%. As a comparison, the KraneShares CSI China Internet ETF (KWEB), a proxy for listed China internet companies, fell by -15.2% in the same time period.
As per my calculations, JOYY allocated approximately $305 million (about 13% of its current market capitalization) of excess capital to share repurchases in the first nine months of 2023, which is roughly triple that of what it spent on share buybacks for 9M 2022.
YY still has around $530 million remaining from its current share repurchase authorization as of September 30, 2023, and the company’s buyback plan was supposed to be in effect till late November this year. It is encouraging to know that JOYY disclosed that it renewed the company’s current share buyback plan for one more year till late November 2024 when it revealed its Q3 2023 financial performance at the end of last month.
Assuming that JOYY completes half of its remaining buyback authorization of $530 million in the next one year, this will be equivalent to a very enticing buyback yield of more than +11%. Separately, YY boasts a reasonably decent consensus forward dividend yield of +5.0% for both FY 2024 and FY 2025.
Closing Thoughts
I don’t see any compelling reasons to upgrade or downgrade my rating for JOYY. There is a reasonably low probability of a substantial drop in YY’s share price, taking into account JOYY’s attractive shareholder return (both buybacks and dividends) yield. On the other hand, it is likely that investors will demand that JOYY delivers positive revenue growth on a consistent basis before the market is willing to accord a higher valuation multiple to YY’s shares.
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