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Bear of the Day: YY Inc. (YY)

Kevin Cook
Weak Job Addition in Private Sector

I last wrote about YY Inc. (YY), the $4 billion Chinese Internet social/gaming portal, as the Bear of the Day in early October when shares were trading around $74. Since then, estimates continue to fall as the Chinese economy stumbles under its own shifts, and in the midst of tariff and technology battles with the US.

 

During the late October swoon, YY shares fell to $57, and during the December rout they dropped to a new 18-month low under $56.

 

Here's what I wrote back in early Oct about the situation and why it was best to avoid YY shares...

 

It's not news to most investors that Chinese stocks are caught in a nasty downtrend, and today's Bear of the Day is another great example why.

 

YY Inc. is a $5 billion Internet communications and content company specializing in social media, gaming, user-generated video and entertainment. They recently completed a spin-off and IPO of their very successful e-sports franchise Huya (HUYA), of which they still own a significant stake. 

 

But the growth outlook is another story and the stock is off 48% from its all time high near $142. Despite projections for 31.7% revenue growth this year and 24% next year to top $2.8 billion, YY has seen its EPS estimates drop sharply in the past few months.

 

Current full-year estimates for the bottom line fell from $8.22 to $7.53. And next year slid from $9.58 to $8.89.

 

I watched this deterioration in the growth outlook as it occurred because I actually held YY shares and had to let them go when the stock became a Zacks #4 Rank (Sell) in early August and broke its April lows near $88.

 

The Zacks Rank saved me a lot more pain, as you can see the shares are over 15% lower since then.

 

YY seems like an Internet value trading under 10X forward EPS estimates and growing sales 25-30%, with hundreds of millions of active users. But in addition to the bear market for most Chinese stocks and indexes, new Internet regulations from the Chinese government continue to hamper expansion and investment.

 

So YY becomes another great lesson in being careful to avoid what looks like a bargain when an entire country's stock market is under siege.

 

Many Chinese stocks will indeed be valuable bargains some day as they serve and capitalize on the largest middle class on the planet.

 

But the time is not yet here to sift through the wreckage. The Zacks Rank will let you know.

 

(end of excerpt from October 4 Bear of the Day)

 

Since then, here's what has transpired in the downward trajectory of full-year EPS estimates...

 

2018: $7.36, down from $7.53

 

2019: $8.06, down from $8.89 -- another 9% drop for this year.

 

Now it's possible that YY could be discovering a bottom between $55-60 and these smacked-down EPS estimates, especially with a Goldman Sachs analyst, who is a big fan, recently upgrading the stock.

 

But until either the "trade peace" is final, or YY estimates start going back up, it's best not to ask "Why not YY?" and just say "No way YY!"

 

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