Investment Thesis
Yalla Group Limited’s (NYSE:YALA) share prices rose sharply after what I’d term a strong IPO. Its price hit its highest point of about $41.5 in February 2021. However, its share price has plummeted to as low as $3.15, representing a 92.4% loss. I attribute this awful performance to a number of challenges, such as the uncertainties arising from Covid 19, slower growth user growth, and lower user engagement in some of its key markets, such as Saudi Arabia.
However, despite this strong share decline, the company appears to have rebounded, and I believe it is now in a long-term bullish trajectory, as shown by a strong share growth of about 74.76% over the last year. I attribute the strong share rebound over the last year to several factors that I believe will keep propelling the company’s share price growth over time. Further, I am drawn by the company’s MOAT, which I also believe will be instrumental in the company’s long-term success. Given this background, I am bullish on the company’s long-term performance.
YALA Is Up Sharply Over The Last Year, Here Are My Thoughts
YALA has exhibited a strong share growth over the last one year, registering a growth of about 74.76% in the said period.
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In my opinion, this performance was driven by several factors, and I believe they will keep growing in the future. Here are my thoughts. To begin with, Yalla is the largest Middle East and North Africa [MENA]-based online social networking and gaming company, with over 48 million registered users and 16.4 million monthly active users as of June 30, 2023. The company operates two popular platforms: Yalla, a voice-centric social networking app that allows users to chat, play games, and join online communities, and Yalla Ludo, a casual board game platform that offers online versions of Ludo and Domino.
As a result of this leading position in MENA and the two popular platforms, in my view, YALA has benefited from the strong demand for online social entertainment and gaming in the MENA region, especially during the COVID-19 pandemic, which has increased user engagement and retention on its platforms. The company’s monthly active users increased by 14.3% year-over-year, reaching 34.2 million, while its average revenue per paying user increased by 23.7% year-over-year to $13.9 in the same period.
Another reason I believe drove the strong share price of YALA is its increased diversity. The company diversified its revenue streams by expanding its product offerings and enhancing its content quality. It launched its first hard-core game, Age of Legends, in May 2023, a self-developed, massively multi-player online role-playing game customized to MENA users’ preferences and cultural habits. Further, the firm also demonstrated at the Dubai Esports and Games Festival 2023 its new voice-based live streaming functionality, which enables viewers to observe and engage in real-time conversation with their favorite streamers. This diversification, in my opinion, has not only helped the corporation hedge financial risks but also widen its revenue creation avenues.
Another major aspect is its establishment of a sustainable account with Standard Chartered Bank, which is one of the leading international banks that provides banking services to clients across Asia, Africa, and the Middle East. The account enables the company to access a range of financial solutions, such as cross-border payments, foreign exchange hedging, trade finance, and cash management. In my view, this will help the company to optimize its capital structure, reduce its currency risks, and support its future growth plans.
Following these strong levers, the company’s financial performance has also improved over the last year despite the tough macroeconomic climate, underscoring its resilience.
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In conclusion, based on these reasons, I believe it is likely that the company’s share prices will keep rising in the future as the company demonstrates its ability to deliver consistent growth, profitability, and innovation in the online social entertainment and gaming industry.
YALA MOAT
A company with a strong moat can sustain its growth and profitability in the long term, and generate value for its shareholders. In my view, YALA has a moat based on the following factors:
Brand loyalty: The company has built a loyal user base in the MENA region, where it is the leading voice-centric social networking and gaming platform. Its platforms cater to the cultural preferences and social needs of the MENA users, who value voice communication over text or video. Further, its platforms also offer high-quality content and services, such as live streaming, hard-core games, virtual gifts, and VIP memberships, which enhance the user experience and satisfaction. Their monthly active users increased by 14.3% year-over-year, reaching 34.2 million, while its average revenue per paying user increased by 23.7% year-over-year to $13.9 in the same period, a testament to the good customer experience and satisfaction.
Network Effects: YALA benefits from the network effects of its platforms, which means that the value of its platforms increases as more users join and interact with each other. The company’s platforms enable users to create and join various online communities based on their interests, hobbies, languages, or regions. Its platforms also allow users to invite friends and family to play games or chat together. Through this network effect, I believe it is easier for the company to grow its client base, which explains the company’s growing MAUs and revenues per user.
Economies of scale: Yalla enjoys economies of scale from its large user base and diversified revenue streams. Its platforms generate revenues from multiple sources, such as virtual item sales, advertising, subscription fees, and game distribution fees. Revenue in Q2 came in at $79.2 million, up 7.8% from the previous quarter. In conclusion, YALA has a moat that preserves its market position and profitability in the MENA region’s online social networking and gaming industry, which I believe will be a long-term growth lever.
Technical Analysis
This section covers my technical analysis of YALA based on several indicators. To begin with, the stock has been in a downtrend since February 2021, when it peaked after its IPO in September 2020. However, over the last one year, the stock appears to have rebounded strongly. It has broken above its 50-day, 100-day, and 200-day moving averages, indicating a bullish momentum.
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Further, the stock is above its Ichimoku cloud, which is a sign of strength. The RSI is at 57, which shows that the stock is neither oversold nor overbought, but it is rising, indicating a bullish trend. The MACD is positive and above its signal line, indicating an upward pressure.
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The other indicator is the support and resistance levels. The stock has a very strong resistance level at about $6.31 and bounced strongly on the resistance zone. The price is headed to the middle line, my long-term support zone; a break above $6.31 would mark a solid long-term bullish trajectory. Further, it has a resistance at about $10.06, which is my target price. I would consider taking my profits and reexamine the trends at this level.
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Risks
While I am upbeat about the stock, investing in this firm has some risks, some of which are as follows: First, the company relies heavily on its two flagship mobile applications, Yalla and Yalla Ludo, for the majority of its revenues. Any decline in these applications’ popularity or user engagement could adversely affect the company’s financial performance and growth prospects.
Secondly, the company is subject to various laws and regulations in its operating jurisdictions, such as data protection, privacy, cyber security, intellectual property, consumer protection, and taxation. It may incur significant costs to comply with these laws and regulations or face legal actions, fines, or penalties for non-compliance or alleged violations. Additionally, any legal or regulatory environment changes could impose new restrictions or requirements on the company’s business operations or affect its users’ ability to offer certain features or services.
Bottom Line
Based on this analysis, YALA’s moat and the solid factors behind its strong past one year lead me to a bullish stance. Further, the technical analysis also signifies that the bullish momentum is peaking momentum. Given this background, I recommend the following investment decisions;
- Buy: For long-term-oriented investors, buy when the price breaks above the $6.31 price, which is my long-term support zone.
- Sell: You can sell the stock when it breaks below its current support levels of $3.07 or fails to break above its resistance levels of $6.31, and $10.0, respectively.
- Hold: You can hold the stock until there is a clear signal or trend change. For example, you can hold the stock if it stays within the range of $3.07 and $6.31, which are the current short-term support and resistance levels.
Generally, I am bullish on the stock’s long-term performance, so my overall recommendation is a buy backed by its moat and the strong growth levers.
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