DouYu Stock: A Mix Of Positives And Negatives (NASDAQ:DOYU)

Edwin Tan /E+ via Getty Images Elevator Pitch DouYu International Holdings Limited (NASDAQ:DOYU) is assigned a Hold investment rating. I previously reviewed DOYU’s financial results for the fourth quarter of the prior year and identified potential re-rating catalysts for the stock in my April 1, 2024 write-up. This article analyzes DOYU’s top line outlook, profitability prospects, and expected capital return. I expect DouYu’s top line performance to improve, but there is uncertainty about DOYU’s bottom line outlook and potential shareholder yield. Therefore, the mix of positives and negatives justifies a Hold rating for DouYu. Revenue Mix Optimization Efforts Will Support Improvement In Top Line Performance DouYu’s revenue decreased by -22.2% to RMB5,530.4 million in fiscal 2023. Based on consensus data taken from S&P Capital IQ, the sell side currently forecasts that DOYU’s top line contraction in RMB terms will narrow slightly to -21.3% this year and predicts that the company will register a positive sales growth of +4.5% next year. My opinion is that DOYU has a pretty good chance of improving its top line performance going forward like what the market expects. Specifically, I think that the company’s revenue mix optimization efforts are likely to deliver results in the quarters and years ahead. The revenue contributed by DouYu’s core live streaming business as a percentage of its top line declined from 92.3% in Q1 2023 to 77.0% for Q1 2024. DOYU’s advertising and other revenue made up the remaining 23.0% of the company’s total revenue for the most recent quarter. These numbers were taken from the company’s Q1 2024 results announcement. In its FY 2023 20-F filing, DOYU noted that the company’s advertising and other revenue comprises of “brand advertisements, game advertisements” and “voice-based social networking and game distribution services.” For the latest Q1 2024, a -41.5% drop in live streaming revenue to RMB800.9 million was partially offset by a +109.3% jump in advertising and other revenue to RMB238.8 million. Moving ahead, DouYu aims to raise its full-year sales contribution ratio from advertising and other revenue from 13.2% (source: 20-F filing) for the prior year to at least 20.0% in this year as indicated at its Q1 2024 analyst call in early-June. DOYU highlighted at the company’s most recent quarterly analyst briefing that its plans are to “advance collaborations with game developers” and expand its “innovative businesses, such as our voice-based social networking service.” In summary, DOYU has done a decent job in diversifying its revenue beyond its legacy live streaming business as evidenced by its Q1 financial metrics. As DouYu’s advertising and other revenue continues to grow, it is realistic to expect the company’s top line performance to get better in the coming years. But An Expected Return To Losses And A Slow Pace Of Buybacks Are Disappointing In contrast with expectations of an improvement in its future top line performance, DOYU’s outlook pertaining to profitability and shareholder capital return is less favorable. DouYu acknowledged at its Q1 2024 earnings call that the company might “experience some deleverage on the profit level” due to “ongoing adjustments to the live streaming business.” At the company’s latest quarterly earnings briefing, DOYU also mentioned that “increased costs related to our other innovative businesses” drove a -140 basis points YoY contraction in its gross profit margin for Q1 2024. In other words, negative operating leverage and investments associated with growing its advertising and other revenue could hurt DOYU’s future bottom line. In specific terms, DouYu is projected to suffer from a normalized net loss of -RMB246 million (source: S&P Capital IQ) in FY 2024 as compared to its actual normalized FY 2023 net profit of +RMB154 million. On the other hand, DOYU’s actual share repurchases have been pretty modest, which will likely leave investors disappointed. With my April 1, 2024 article, I noted the company’s “initiation of a new one-year $20 million share repurchase plan which came into effect on January 1, 2024.” In the first three months of this year, DouYu only bought back $2.7 million worth of its own shares. This is equivalent to an annualized buyback yield of 3.3% and represents just 13.5% of its buyback program. The company doesn’t pay a dividend, so its shareholder capital return is solely based on buybacks. If DOYU continues with a similar rate of share repurchases for the remaining quarters of 2024, the estimated full-year buyback yield of approximately 3.3% or at the low-single digit level is unlikely to meet investors’ expectations. Closing Thoughts It will be reasonable to think that the market will be focused on DouYu’s revenue growth prospects, profitability outlook, and shareholder capital return in assessing the stock as a potential investment candidate. DOYU doesn’t appear to be an outright Buy or Sell taking into account the mixed takeaways from these different factors. The current consensus next twelve months’ price-to-revenue multiple of 0.54 times (source: S&P Capital IQ) for DOYU might seem to be undemanding on an absolute basis. But one has to take into account DouYu’s expected FY 2024 losses and modest share repurchase activity which justify some form of valuation discount.

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