Investors in Yalla Group (NYSE: YALA) have endured a tough year having watched the company's share price tumble. The stock gained after its IPO and went from strength to strength amid the unique market conditions but started falling in early 2021. There were numerous setbacks for investors, including a collapse in August 2021, triggered by the announcement that the social networking company had made less revenue than analysts had predicted for its second quarter of 2021. The stock is now trading at $4.11 a share, down from highs of over $25 a share last April and $39 a share last February.

Yalla, a Dubai-headquartered social media firm, operates a voice-centric social networking and entertainment platform in the Middle East and North Africa (MENA) region. Yalla's software provides group chatting and gaming services. Its platforms also sell and distribute virtual items and upgrade services. The stock was only launched in September 2020. The IPO, which was priced at $7.50 per ADS (American depositary share), raised approximately $140m in proceeds.

At a little over $4 a share, I'm bullish on Yalla. The firm, which is valued at a little over $600m, posted a net income of $82.6 million in 2021 compared with a net income of US$3.2 million in 2020. The firm is growing topline revenue and earnings while producing cash flow growth and continuing with its expansion plans.
 

Recent performance

Despite the falling share price, the business's fundamentals look positive. Data from the last reporting period demonstrates positive year-on-year growth. Revenue was $273.1m in 2021, representing an increase of 102.4% from 2020. Meanwhile, net income was $82.6 million and the net margin was 30.2%, compared with a net income of US$3.2 million in 2020. This growth is referenced in the table below.

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Topline revenue by quarter has grown substantially since its IPO, but it is worth noting that Q4 of 2021 saw a fall in both revenue and income. This can be observed in the charts below.

Another important metric for the firm is the average monthly active user (MAUs). Average MAUs increased by 71.0% to 28.1m in the fourth quarter of 2021 from 16.4m in the fourth quarter of 2020. Continued growth in user numbers is a key component of cash generation.

Another primary contributor to solid revenue growth was the significant growth in the number of paying users, which increased from 5.2m in the fourth quarter of 2020 to 8.4m in the fourth quarter of 2021. The main growth driver was the platform's Ludo game offering. There was a 52% increase in the number of Yalla Ludo's paying players – from 4.0m to 6.2m over the course of the year.

Research and development costs were higher while selling and marketing costs also rose due to "higher advertising and marketing promotion expenses."

Yang Tao, Founder, Chairman, and CEO of Yalla described 2021 as a "remarkable" year for the company. "We made tremendous progress in expanding our product portfolio, establishing an integrated ecosystem and elevating the rich diversity of our business and its services to new heights," he added. Tao also noted the launch of the MENA region's first-ever social metaverse app, WAHA – which enables users to enjoy immersive, 3D social scenes – and an update to YallaChat.

The management highlighted game distribution business in mid-core to hard-core game projects. Yalla is attempting to further broaden product range, noting diverse developments, investments and collaborations in line with the evolving needs of their customers.
 

Risks

There are a number of risks that may be playing on the company's share price. One of those is that the negative growth observed in Q3 and Q4 could continue. Past performance is by no means indicative of what will happen in the future, but it's certainly not the trajectory that investors would have been hoping for.

Building on that point, in many parts of the world, life now continues as normal despite the presence of Covid-19. A number of tech companies have seen user numbers dwindled since the height of the pandemic and the copious lockdowns of 2020 as people returned to their normal and more sociable lives. As a result, it may be the case that Yalla's growth through to early 2021 was not sustainable outside of the pandemic.

There are other issues too. One issue is around higher inflation and higher interest rates. For one, higher interest rates can lead businesses to amend or pause their plans for growth. In the stock market, higher rates can incentivise investors to sell assets and to take profits. This is especially true following a booming year, like the one we saw in 2021. Investors, myself included, may also prioritise dividend stocks in the short term as growth stocks become less appealing.

It's also worth remembering that Yalla has some pretty stiff competition in the social networking space, including Facebook, Snapchat, Twitter, among others. Yalla has found a bit of a niche since it started, but there's nothing to say that established social media players won't grow into their area.
 

Comments

For a tech stock, Yalla's price-to-earnings ratio of around 10 makes it look pretty cheap to me. And that's why I'm bullish on this one. But it doesn't come without its concerns. Most importantly, I'd like to see evidence that the recent downturn in revenue growth isn't sustained and that the company can identify further areas for expanding the business and its income. Yalla is certainly ambitious on that front. The firm intends to enhance its offering in the "more immersive" social experience area, as users seek "metaverse" type interactions with each other. Additionally, Yalla is expanding into the South American market with its Parchis app which may begin to bear fruit for the social media firm in the coming years.

While I have mentioned concerns around the impact of higher interest rates in the inflation-ridden world of 2022, it certainly worth noting that Yalla has enough cash and equivalents for its expansion initiatives. That's certainly a positive.

And finally, last May, Yalla announced a share repurchase programme. We're not talking about huge figures here, but, for me, a buyback is normally a positive reflection on the health of the business and the management's outlook.