Are Yalla shares hugely undervalued?

Dr James Fox explains why investors should consider Yalla shares with the company’s enterprise value sitting at just two times the firm’s earnings.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Smiling white woman holding iPhone with Airpods in ear

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’m yet to buy Yalla (NYSE:YALA) shares, but it’s something I’ve been considering doing for a while. However, after the Q4 results, and some more research, I’m confident this stock is a buy, and I’ll be adding it to my portfolio when I have the funds available.

Let me tell you why.

What is Yalla?

In 2022, Yalla became the largest MENA-based online social networking and gaming company in terms of revenue. The Dubai-based tech firm rose to prominence during the pandemic with its voice-centric communication platform and soft gaming offer.

Valuation

The company’s market-cap is around $583, and with $407m in cash and cash equivalents at the end of Q4, Yalla has an enterprise value of around $176m. To put that into context, in the last two years, Yalla has recorded net income of around $80m.

The firm currently trades with an EV-to-EBITDA ratio of just two, far below its sector (communications) median of 9.6. Yalla’s huge cash and cash equivalents positions also provides management with flexibility on growth plans, share buybacks and dividends — it’s something of a safety blanket which many young companies just don’t have.

To me, Yalla is clearly undervalued.

Source: Yalla Presentation

New growth push

Yalla is something of a company in transition. That’s because its two most successful apps, Yalla Chat and Yalla Ludo, are maturing and there may be better growth prospects in other parts of the market. That’s why Yalla is investing in mid-and-hard-core gaming.

However, the company is doing this without taking on debt, which is highly useful with interest rates pushing higher and higher.

That’s not to say the transition isn’t weighing on performance. Yalla’s Non-GAAP margin fell from 40.8% in Q4 of 2021, to 29% in Q4 of 2022. That’s a considerable fall, although it’s clear this is still a strong margin.

R&D spending and new hires — predominantly in research positions — can be seen in cost growth. Total costs came to $60.1m in Q4 of 2022, versus just $49.3m in Q4 2021.

For some analysts, this is a necessary development despite user numbers in mature apps continuing to grow over the past year. During the pandemic, the company registered double and even tripled digit growth. In a post-pandemic world, it seems the company need to keep innovating.

Source: Yalla Presentation

Where next?

Yalla only listed in September 2020 and was priced at $7.50. The company raised around $140m during the IPO. But before long, the stock was trading for $39 as platform usage surged and the pandemic stoked retail investment.

I believe the stock will push upwards from the current $3.90. We won’t see the results of the company’s transition overnight, but I don’t expect to see the company’s profitability eroded much further by rising costs in the near term. Trading at such low multiples, with a huge cash pile, I think Yalla is a buy.

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 assessed. Consider taking independent financial advice.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Is Amazon still a top growth stock after its Q4 report?

With sales growth slowing and AI investments weighing on near-term profits, do investors have better stocks to consider buying than…

Read more »

Investing Articles

Down 15% and with a P/E below 9! Is the GSK share price still in deep value territory?

Harvey Jones has something to celebrate after a positive set of results boosted the GSK share price after a disappointing…

Read more »

Investing Articles

The Diageo share price is down 44% since 2021, but I won’t sell my shares!

The Diageo share price has almost halved since peaking in late 2021. But with the stock at a one-year low,…

Read more »

Man changing battery on electric bicycle
Investing Articles

Suddenly my FTSE income shares are giving me growth too – including this 9% yielder!

Harvey Jones loves his FTSE 100 dividend income shares but was disappointed by the lack of growth. Now it looks…

Read more »

Investing Articles

This FTSE AIM travel business could absolutely skyrocket in 2025

FTSE AIM stock Jet2 appears to be a bargain in plain sight. I’m desperately searching for reasons not to buy…

Read more »

Investing Articles

This Bank of England news makes me fear for Lloyds and its share price!

Warnings of weak economic growth, resurgent inflation, and falling interest rates pose a toxic cocktail for Lloyds' share price.

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

2 UK shares that could soar if interest rates sprint lower!

The Bank of England's latest meeting has fed speculation of swingeing interest rate cuts. I think these UK shares could…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

My favourite FTSE dividend stock just jumped 17%! So why am I sad?

This investor has mixed feelings today as a quality dividend stock from the FTSE 250 surged higher in his portfolio.…

Read more »