Photo by Wance Paleri on Unsplash
 

Yalla Group (NYSE: YALA) may have missed some analysts' estimates for Q4 – Wall Street had expected earnings per share of $0.18 versus a realized $0.12 – but the highly innovative entertainment and gaming platform continued to report revenue and user growth QoQ and YoY.

According to a research report from Frost and Sullivan, Yalla has become the largest MENA-based online social networking and gaming company in terms of revenue in 2022.

The group is uniquely positioned to benefit from the increasing digitalization of the MENA region and from the continued monetization of its growing customer base. Efforts to diversify revenue towards gaming services will take time. Investors should back Yalla in the long run.

Talking points

• Revenues were US$75.1 million in Q4 of 2022, an 11.2% increase from US$67.6 million in Q4 of 2021.
• Average monthly active users increased by 14% to 32 million in the fourth quarter of 2022, up from 28.1 million a year previous.
• Net income was US$16.6 million in the fourth quarter of 2022. That’s down from US$19.1 million in the fourth quarter of 2021.
• Net income was US$79.0 million for 2022. That compares with US$82.6 million in 2021.
   

Introduction

Yalla, a Dubai-headquartered social networking and gaming firm, operates two flagship mobile applications, Yalla, a voice-centric group chat platform, and Yalla Ludo, a casual gaming application featuring online versions of board games in the Middle East and North Africa (MENA) region. The company provides group chatting and gaming services tailored to its fast-growing market while selling and distributing virtual items and upgrade services.

On Monday, Yalla Group announced its financial results for Q4 of 2022. The headline results came in slightly lighter than some analysts had been anticipating, with revenue for the last quarter coming in at US$75.1 million versus a consensus estimate of US$75.3 million.

However, there were several positive takeaways, including continued growth in average monthly active users (MAUs) and paying users. The results will unlikely inspire a turnaround in the share price which once traded as high as US$39. The stock was only launched in September 2020 and was priced at US$7.50 per ADS (American depositary share) for the IPO, raising approximately US$140m in proceeds.

So, what's next for Yalla Group?

I'm positive about Yalla's growth trajectory despite growth slowing in recent quarters, with the company occupying a leading position in the region's highly lucrative chatting, gaming, and entertainment market. Let's take a deeper dive into the results data and explore growth potential.
 

Growth despite headwinds

Yalla's YOY revenue and user engagement recorded solid year-on-year growth in 2022 despite macroeconomic challenges. However, it's important to note that Q4 was also a slower quarter in 2021. As such, the 11.2% revenue increase YoY this year should be viewed positively. Yalla's management had forecast revenue to come in between US$70 million and US$76 million in Q4 2022. The delivered US$75.1 million will have been an upside surprise for some investors.

The chart also broadly shows that revenue generated from gaming services, as a percentage of total revenue, steadily increased, from 23.8% in 2021 to 29.2% in 2022.

Positive growth in MAUs has been seen for 11 consecutive quarters. Q3 saw the first time that MAUs had topped 30 million. This can only be seen as a positive – a growing user base can be leveraged to enhance revenue generation moving forward. The 47% growth in paying users demonstrates that the company is making good progress in monetizing its user base.

Yalla Presentation

Diversification

As the number one MENA-based online social networking and gaming company, the firm says it is strongly committed to this market and has developed a deep understanding of its unique advantages and user needs.

The below infographic shows Yalla's diverse operations in the space.

Yalla Presentation Q4

The two flagship applications, Yalla and Yalla Ludo, generate a large proportion of revenue. It is possible that the chatting and ludo services have reached a mature point in their lifecycle, but the company still hopes to expand these applications. Meanwhile, it is imperative that the company continues to develop new growth drivers. Yalla is making progress here.  

The group has launched several casual game products, including 101 Okey Yalla and Yalla Baloot, developed to sustain vibrant local gaming communities in MENA, and Yalla Parchis, a Ludo game designed for the South American markets. And in Q4 of 2022, the company said that it boosted Parchis' monetization capabilities, rolling out new features including more premium rights for VIP users.

Yalla Game, a subsidiary formed to explore the mid-and-hard-core gaming business, has finished the first round of beta testing on its hardcore SLG game – Merge Kingdom, and the first RPG game. Moreover, in the Q4 report, Yalla said it had established a mid-and-hard-core game studio internally to focus on research and development, and that it was continuing to search for high-quality game studios for acquisition opportunities. The firm also reiterated its intention to become a distributor for global games producers, leveraging its large MENA network.

Investment, such as that in a game studio for R&D, may result in some near-term pain. Yalla's Non-GAAP margin has fallen from 40.8% in Q4 of 2021, to 29% in Q4 of 2022. Clearly, this is not a positive trend, but it's hopefully just transitory. Further margin compression would likely be attributable to investments related to new products – Yalla said in Q4, the majority of new hires were R&D professionals.

While inflation will have been one factor, increased R&D spend and hiring can be observed in cost acceleration. Total costs and expenses came in at US$60.1 million in the fourth quarter of 2022, compared with US$49.3 million in the fourth quarter of 2021.

Despite macroeconomic headwinds in 2022, the company hopes to benefit from trends in digitalization in the MENA region going forward.

“Frost and Sullivan recently issued a research report recognizing Yalla as the largest MENA-based online social networking and gaming company in terms of revenue in 2022. We believe that as the region's leader across both social networking and gaming, we are uniquely positioned to capitalize on MENA's strong digitalization trend and unleash massive growth potential," Yang Tao, Founder, Chairman and CEO said in a statement.

We're unlikely to see this growth from gaming and broader digitalization of the MENA region actualized in the very near term. Yalla sees Q1 2023 revenue of US$68-75 million – lower part due to the seasonal impact of the Ramadan fasting period.
 

Strong position, few risks

Despite a slowing growth trajectory in recent quarters, this tech stock continues to post-index beating revenue growth. But naturally, investors will also be hoping to see investments in R&D and gaming deliver a long-term gain in the form of revenue diversification.

However, I want to highlight that, for a growth stock, Yalla has an abnormally strong cash and income position. As of the end of Q4, the company is sitting on US$407 million in cash and cash equivalents – up from US$351 million a year previous – and Yalla has only posted profits since listing.

Yalla's positive cash flow makes the company look particularly attractive as an investor right now. With interest rates still rising, borrowing is increasingly expensive. As such, the cost of growth is going up for many companies around the world. It's also worth adding that amid the current banking-cum-tech-financing fiasco, access to financing can't be easy. With its huge cash reserves, Yalla can also earn interest on its capital deposits.

In fact, with the company's market cap of around US$590 million, Yalla has an enterprise value of around US$183 million. With net income coming in at US$79 million for 2022 as a whole, we can observe that the company trades at an enterprise value of around 2.2 times earnings. With such a large net cash position, Yalla has considerable flexibility with regard to its future plans and may even wish to engage in value-accretive share repurchases.

I do fear that some investors may lose hope if topline growth fails to push upwards again. However, I'm confident the company will be able to leverage its leading position in the MENA region through more offerings in the gaming sector. With no burn rate to worry about and a network of 32 million monthly active users, I’m rating Yalla as a 'buy'.

More By This Author:

Yalla Group Q3 Earnings: Quarterly Revenue Passes US$ 80 Million As Steady Growth Continues
How Does The Need Of Marketization Of HFCVs Impact PEM Industry?
Li Auto Goes From Strength To Strength. Here’s Why!