On Tuesday, HSBC upgraded HUYA Inc. (NYSE:HUYA) stock from Hold to Buy, increasing the price target to $6.00 from the previous $3.77.
The upgrade follows HUYA's performance that suggests a potential turnaround, with the company expected to become free cash flow positive in 2024 after two years of decline.
HSBC's analysis indicates that live-streaming revenue for HUYA may stabilize quarter-over-quarter in the second quarter of 2024, which could contribute to overall revenue growth following six consecutive quarters of decline.
The firm anticipates that HUYA will continue to see rapid growth in high-margin game-related services, advertising, and other revenues, which is expected to expand the company's gross profit margin (GPM) between 2024 and 2026.
HSBC also notes HUYA's disciplined approach to cost control, which is likely to support this growth.
HSBC's upgrade comes after HUYA outperformed expectations in the first quarter of 2024 and is based on a revised long-term free cash flow compound annual growth rate (CAGR), which has been raised from 6% to 15%.
HUYA's financial position appears robust, with the company holding $1.16 billion in cash, which is 12% above its current market capitalization. This strong cash position comes after HUYA paid out a $150 million dividend in May.
The company has also demonstrated a commitment to shareholder returns through a combination of buybacks and dividends, having returned $200 million to shareholders.
With approximately $50 million remaining in its buyback program, HSBC suggests that HUYA might extend the program in August 2024 with an additional $100 million. The firm also speculates that if HUYA can deliver a margin surprise, there could be potential for regular dividends.
HSBC highlights the investment attractiveness of HUYA, noting that the company is trading at 0.57 times its estimated 2024 price-to-earnings growth (PEG) ratio, which is considered undemanding compared to the 0.70 times PEG ratio of its live-streaming peers.
InvestingPro Insights
Following HSBC's optimistic outlook on HUYA Inc., the InvestingPro platform provides additional insights that may be of interest to investors. Notably, HUYA has been trading at a low revenue valuation multiple, which aligns with HSBC's view of the stock being undervalued. The company's market capitalization currently stands at $1.08 billion, reflecting a price-to-book ratio of just 0.82 as of Q1 2024, underscoring the potential for investment value.
Investors may also find encouragement in the company's recent performance metrics. HUYA has seen a significant return over the last week with a 17.74% increase, and an impressive 72.36% return over the last year, indicating strong market momentum. Additionally, the InvestingPro platform highlights that HUYA holds more cash than debt on its balance sheet, which could be a sign of financial stability and resilience.
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