Bear of the Day: YY (YY)

YY Inc. (YY) is finding it expensive to acquire content for its live streaming business. This Zacks Rank #5 (Strong Sell) has seen its earnings estimates cut for both 2019 and 2020.

YY is a leading live streaming social media platform in China.

YY Beat in the Fourth Quarter of 2018

On Mar 4, YY reported its fourth quarter results and beat the Zacks Consensus Estimate by 9 cents. Earnings were $1.87 versus the consensus of $1.78.

Revenue jumped 28% to $675 million year over year.

Mobile live streaming monthly active users were up by 18.1% to 90.4 million. The number of live streaming paying users jumped 36.6% to 8.9 million from the prior year.

However, gross margins fell to 35.1% from 39.4% in the fourth quarter of 2017 due to an increase in revenue-sharing fees and content costs.

Estimates for 2019 and 2020 Cut

Zacks has only one estimate for both 2019 and 2020 and it has been cut in the last 60 days on both years.

The Zacks Consensus for 2019 has fallen to $6.27 from $7.46 over the last 2 months, which is a decline of 12% from 2017 because the company made $7.13 that year.

2020 is also looking a bit weak, as the Zacks Consensus fell to $6.74 from $7.90. That's earnings growth of just 7.5%.

Shares Soar in 2019

But despite the decline in the estimates the last 2 months, the shares have roared back in 2019, and are up 39% year-to-date.

Shares were dirt cheap after the December 2018 correction.

They're still attractively valued, with a forward P/E of just 13.4.

But the growth that many investors were used to may be slowing. Sales are expected to grow only 18% in 2019 and 19% in 2020 versus its two prior years, 2017 and 2018, which saw sales jump 50.8% and 32.4%, respectively.

With declining earnings year-over-year, slowing growth, and a big rally in the shares, investors should be cautious of a possible value trap scenario.

Chinese Internet content companies with better Zacks Ranks include Tencent Music (TME), a Rank #2 (Buy) and Sina Corp. (SINA), a Rank #3 (Hold).

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