Stock Boy Uncovers 30-Year-Old Market Secret
30 years ago, back when this Atlanta hardware store had only 4 locations, a clerk proposed a brilliant solution to the store’s biggest issue… not being able to project future sales and inventory needs. Within two years from that day, the store had opened 100 new locations. But the employee didn’t stop with predicting store demand, he used the same principles and applied it to the stock market.
The Trump Administration’s latest round of tariffs on goods from China went into effect Thursday as the U.S. imposed 25% tariffs on another $16 billion of Chinese goods impacting 279 products ranging from chemicals to motorcycles.
China immediately retaliated with 25% tariffs on an equal amount of American goods.
The two countries have now imposed tariffs on $50 billion worth of each other’s goods in the conflict, which the Fed warned this week could spur inflation and cause businesses to slow down investments should there be a “major escalation” in the trade war.
While the two countries are in talks to renegotiate trade between them, President Trump said in an interview with Reuters on Monday that he didn’t “anticipate much” from those talks and that he had “no time frame” for ending the trade dispute with China.
But aside from the tariffs on goods, the rising trade tensions can also be thanked for the slump in Chinese stocks listed in the U.S.
Two such stocks are now trading at a sizable discount and offer massive upside potential. Here’s what you need to know about them.
YY Inc (NASDAQ: YY)
YY (NASDAQ: YY) is primarily a live video streaming company. The majority of the company’s revenues come from the sale of virtual items and gifts sent to live streaming content contributors by their followers, and its other revenue sources include online gaming, subscriptions, and advertising.
The live streaming business is a good one to be in. China’s internet penetration is very low compared to other developed countries at just over 50%. However, that internet penetration is growing quickly and the live video streaming industry is growing extremely quickly.
The live streaming market in China exploded by 180% in 2016 and a report by the investment bank China Renaissance Securities estimates the live streaming market to triple by 2020.
YY is one of the most established players in China’s live streaming industry. Its cash and investments make up a staggering 73% of YY’s market cap with a lot of potential for growth.
The stock has been beaten down recently after reporting a loss in their Q2 results and lowered guidance. YY reported a loss of $20.7 million, however its revenue was up 45% from the same quarter a year ago at $570.2 million. The company noted that the revenue on its entertainment live streaming platform had increased 50% in Q2 to $538 million.
“During this quarter, we achieved solid progress in traffic acquisition, product advancement, and technology enhancement,” said YY’s chairman and acting CEO, David Xueling Li. “Our mobile live streaming monthly active users (MAU) increased by 21.3% year-over-year to 80.2 million, and our total live streaming paying users increased by 21.1% year-over-year to 6.9 million.”
YY also guided for Q3 revenue of 3.89 billion to 4.02 billion yuan, or $564.5 million to $583.3 million, but that guidance was below analysts’ expectations which fueled the stock price lower.
But YY is looking quite oversold and is trading at a steep discount. Shares are down 32% so far this year and nearly 24% this month alone.
The consensus analyst price target for YY is $132.67, suggesting possible upside of 73.5%. However, analysts at JPMorgan Chase recently boosted their price target for the stock to $155 – 102% higher than Thursday’s closing price.
SINA Corp (NASDAQ: SINA)
Despite topping analysts’ estimates in its Q2 earnings report earlier this month, SINA (NASDAQ: SINA) shares have been hammered after comments by the company’s management left investors worried about the second half of 2018.
SINA is one of China’s oldest and most established internet companies. The company generates roughly 80% of its revenues from its social media platform, Weibo (NASDAQ: WB), which it spun off in 2014. While the company maintains a controlling stake in Weibo, the rest of its revenues come from its network of portal sites and up-and-coming fintech unit.
The company’s growth rates look pretty good, and its non-GAAP revenue surged 50% to $537.4 million in Q2. But SINA’s stock has been beaten down over concerns about rising expenses, currency headwinds, and softer demand from small to medium-sized enterprises (SMEs).
SINA’s non-GAAP operating expenses rose 81% to $272.1 million in Q2 causing its operating margin to dip by two percentage points annually to 30%. That decline seems minor, however investors have concerns about tougher competition from Tencent’s (OTC: TCEHY) WeChat messaging app which could send SINA’s spending higher to compete.
But much like YY, these concerns seem overblown and the stock is oversold. It’s also massively undervalued with prices in the $70s and its likely the price will rebound dramatically when trade tensions ease up as SINA is still one of the biggest advertising platforms in China with its Weibo platform.
Analysts’ consensus price target for SINA is $152.50, or 119.4% higher than today’s closing price. JPMorgan Chase also recently boosted its price target for SINA to $179 – 157.5% higher than where the price is now.