With a P/E of just 8, this social media newcomer is a cheap stock pick!

This social media firm looks like a cheap stock pick for my portfolio. For a growing tech firm, it certainly has a low price-to-earnings ratio.

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.

Image source: Getty Images

Following a considerable fall in the share price over the past year, I’m seeing Yalla (NYSE:YALA) as a cheap stock pick. Growth and tech stocks are certainly not in vogue right now, but many still trade with considerably elevated multiples. However, despite being a relative newcomer (founded in 2016), Yalla is profitable and looks cheap compared to its established peers.

It’s a UAE-based tech platform that aims to become largest destination for online social networking and entertainment activities in the Middle East and North Africa. It generates revenue from chatting and gaming services.

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Here’s why I think Yalla would be a good addition to my portfolio.

Valuation

It has a price-to-earnings ratio (P/E) — a metric for valuing a company linked to its current share price relative to its earnings per share — of just 8.2, based on its performance over the past 12 months. It has a forward P/E ratio of 7.8 on projected earnings for the year. That’s pretty good for any stock, but it appears particularly cheap given its growth prospects and the valuations of its peers.

Here’s how Yalla stacks up against established social media and tech stocks.

StockP/E ratio
Yalla8.2
Twitter131
Meta14.5
Alphabet Inc20

As the data suggest, Yalla is cheap compared to its established peers. In fact, it’s many times cheaper than Twitter.

It also looks cheap when we compared these companies by their price-to-sales (P/S) ratio. This is calculated by taking the stock’s market capitalisation and dividing it by the company’s total sales or revenue over the past year.

StockP/S ratio
Yalla2
Twitter5.6
Meta4.5
Alphabet Inc5.5

Growth

Yalla’s year-on-year user growth is impressive. In the recently released Q1 report, the company highlighted that average monthly active users (MAUs) reached 29.2m during the period, representing a 55.3% increase year-on-year. There was also a 61% increase in the number of paying users versus the first three months of last year. There were 9.4m paying users in Q1 2022.

Revenue also grew year-on-year from $67.6m to $72.3m. The Q1 figure is actually the highest quarterly revenue achieved by the firm. However, the growth rate has slowed slightly since 2020 when revenue grew substantially. Although the Q1 performance will put investors at ease after a slight decline in revenue during Q4 2021.

Net revenue actually fell to $17.7m from $19.8m in Q1 2021 with Yalla management talking about investing more in R&D to enhance its offerings. Among other developments, it has launched the region’s first-ever social metaverse app, WAHA. 

Risks

Yalla’s management has acknowledged that 2022 is “shaping up to be a year full of challenges“. The group said it would focus on enhancing its offering during the period. One challenge revolves around the increasing cost of borrowing in the current environment. Higher interest rates increase the cost of growth. It will also have to be wary of competition and established players enhancing their offering in the region.

Should I buy?

I think Yalla would be a good addition to my portfolio. The stock looks cheap compared to its competitors and appears to be on a promising growth curve.

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James Fox has no position in any of the companies mentioned. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Alphabet (A shares), Alphabet (C shares), and Twitter. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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