IS DOYU THE BEST CHINESE GROWTH STOCK?
Looking for a stock with 3 year-revenue growth of over 100%, positive free cash flow, zero debt, market cap of only $4b and a price-to-sales ratio of 3! Let me tell you about DouYu 👇
DouYu (DOYU) is often referred to as the Twitch of China as its one of the leading video game streaming platforms in the region! The company is the second most popular online gaming platform behind rival Huya however that's not going to matter soon as the two companies plan on merging together to dominate the Chinese videogame streaming and esports market!
This deal is expected to close in 2021 and the company will trade under HUYA's name! Together the business will have more than 300m users and they'll control an 80% share of the videogame streaming market giving them a clear advantage over new threat Douyin which is owned by Tiktok creator Bytedance!
Another huge advantage for the newly merged company which for now I'm going to call Duya! is that Chinese video game giant Tencent will own a 68% stake in the business. Tencent is the world's largest video game publisher by revenue and is behind games including Fortnite, League of Legends and Clash of Clans, and I think it's more than likely we'll see Tencent start to integrate Duya into these blockbuster games!
Not only that but Tencent has more than a billion users of its popular app wechat - and towards the end of 2020 - Tencent added a built-in streaming feature which links these billions of users with HUYA's platform.
That said there are a couple of concerns to be aware of! Firstly, the Chinese regulator has been very vocal about cracking down on monopolisitic practices amongst the country's largest tech companies. This means it's likely that the proposed merger of HUYA & DOYU will be under intense scrutiny from the Chinse Administration and there is a chance that the deal could be stopped.
This would change the course of DoYu's stock however I'm not too concerned as I believe that the addressable market is enormous and I think the company could fare just as well on its own!
Perhaps more worryingly then is the latest reports from short-sellers Grizzly Research claiming that DoYu should be investigated for hosting illegal gambling activities on its platform. In China, all gambling is considered illegal and over the past we have seen many platforms accused of hosting such activities.
In fact, social media platform Momo recently had to restructure its business to clamp down on illegal gambling activity and since they did that, the company has reported an alarming deceleration in earnings growth and the stock has been slaughtered.
If Grizzly Research is right, and a portion of DoYu's revenue is coming from gambling activity then the stock's growth could well take a hit, however we've seen short sellers take aim and try to bring down high flying growth stocks in the past and if Doyu is cleared of these allegations, then I see no better way to ride China's esports boom!
You can check out how DouYu compares with other growth stocks in the table below (The stock is the cheapest on based Price-to-sales!) 👇
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