China Social Media Sites: How To Invest In a Rising Star

Page 2 of 2

While there’s sometimes controversy over the ethics of some of YY and YY Music’s more risqué segments, the actual idea behind a social media network that allows users to pay to socialize is ingenious. Charging users to message a friend on a site like Facebook Inc (NASDAQ:FB) would feel almost avaricious. On YY Music, however, users are receiving an artistic service in exchange for their digital payment. Sex appeal or no sex appeal, it’s an economically justifiable transaction.

Value and profitability

All of the aforementioned highlights wouldn’t mean squat, however, if the stock didn’t have good growth or earnings prospects. Something investors like Steadfast have probably noticed is that YY has a bit of both. Despite their meteoric post-IPO rise, shares of the company trade at a mere 12 times trailing earnings and—more importantly—a lowly price-to-earnings growth multiple of 0.26.

With the sell-side projecting bottom line growth of 47.1% a year over the next half-decade, YY’s valuation hasn’t caught up with its potential just yet, even though it sure as heck is trying to. No debt and gross margins above the 50% mark are icing on the proverbial cake, and give credence to the possibility that if ARPU and user growth figures continue on a fairly upward trajectory, Wall Street’s lofty EPS forecasts are within reach.

In short, YY easily scores a perfect 4-for-4 when it comes to momentum, innovation, value and profitability, so it wouldn’t a bad idea for individual investors interested in mimicking Steadfast here to perform more research on these four factors. Check back on Insider Monkey for more updates on China’s social media sites.

Click here to learn more about Insider Monkey’s Hedge Fund Newsletter.

Insider Monkey’s small-cap strategy returned 47.6% in its first year ended last month, beating the S&P 500 index by more than 29 percentage points. Try it now by clicking the link above.

Disclosure: none

Page 2 of 2