Choose language

en
  • cs

  • de

  • el

  • en

  • es

  • et

  • fr

  • it

  • kk

  • lt

  • nl

  • pl

  • pt

  • ro

  • ru

  • uk

English
  • Čeština

  • Deutsch

  • ελληνική

  • English

  • Español

  • Eesti keel

  • Français

  • Italiano

  • Казақша

  • Lietuvių

  • Nederlands

  • Polski

  • Português

  • Română

  • Русский

  • Українська

How do you prefer to top up your account?

* We don't charge any commission for making deposits into your account

Our analysts cannot write ideas in all languages, so we show you their publications in English.

Max Manturov

Max Manturov

Head of investment research regulated by CySec 23.02.2022

Yalla Group Limited: don't miss out on a potential short-squeeze

Ticker: YALA.US
Current price: $6.55
Target price: $12
Growth potential: 83%
Time horizon: 3 months
Risk: High
Position size: 2%

An alternative way of investing in an idea:

Buying through options:
CALL: Strike: 10, Maturity: 14/04/2022
Entry prices: CALL: $0.40
Upside potential for options: 425%
Maximum possible loss on options: 100%
Time Horizon: 2 months

The company

Yalla Group Limited operates a social audio app and entertainment platform called Yalla - primarily in the Middle East and North Africa region. The company's platform sells virtual goods. It also offers group chat and gaming services.

What's the idea?

Capitalise on the expected supply-demand imbalance in favour of the bulls by purchasing stock options (ADRs) of Yalla Group Ltd.

Why do we like Yalla Group Ltd.?

Reason 1. Positive momentum reflected in business drivers on the back of dominance in the Middle East and North Africa

According to a Frost & Sullivan report, the company is now the largest social audio app in the Middle East and North Africa.

The company's product is essentially an adaptation of the highly acclaimed Clubhouse for a Middle Eastern and North African audience. In addition to voice chat, there are games - particularly Yalla Ludo.

Clubhouse began to lose its audience (and consequently all the hype around the new technology) the moment that global social networks (such as Twitter) began adapting the audio technology.

Unlike Clubhouse, Yalla's performance has not stopped growing, even after a significant drop in the share price, as evidenced by the business's operational metrics.

Below are the key drivers of business growth. We have seen significant growth in MAU (monthly active users) across all business segments. Moreover, during the year (based on Q3 reports) the number of paying users increased by 51%, the main driver of this was a 52% increase in the number of Yalla Ludo’s paying players - from 4 million to 6.1 million:


Source: 6-k company reports


Buy Yalla Group Ltd. Shares >>

Reason 2. Improved financial results

Yalla's quarterly revenue has grown significantly since its IPO; EBITDA by quarter, with the exception of Q3 2020, has followed the same trajectory as sales revenues. The chart below depicts the company's quarterly revenue and EBITDA data, indicating the company's stable growth position:


Source: Thomson Reuters Eikon

The quarterly evolution of the company's net profit is reflected in the millions of dollars. This business is not burdened by a large amount of fixed assets, so the net income is similar to EBITDA in size:

Source: Thomson Reuters Eikon

There are no direct competitors (with the exception of LIZI - Small Cap). Comparisons with indirect competitors should not be made, as this may subsequently form a distorted perception of the company's state. Current multiples should be compared with expected future multiples, taking into account the company's growth:

  • EV/EBITDA - 8.28x vs FWD EV/EBITDA 6x
  • EV/Revenue - 2.52x vs FWD EV/Revenue - 2.34
  • EV/CF - 14.95x vs Forward EV/CF - 5.33x
  • The P/E ratio over the last 60 days:

Source: Thomson Reuters Eikon

Based on the data from the refinitives, given the growth of the business Forward P/E is 8.17 - a very conservative value. With this revenue and net income growth, the ratio level is optimal.

The company has no debt. Also, the company is rich in cash, part of which could be used for the previously promised buyback and for potential mergers and acquisitions.

Source: Thomson Reuters Eikon

Reason 3. Buybacks

On the 21st of May 2021, Yalla Group Limited announced a share buy-back programme of up to 150 million USD with a term of 12 months. To date, no shares have been repurchased. We believe that there is a high probability of seeing a share buyback by the company before the 21st of May 2022. Today the announced amount is 15% of the company's capitalisation and these buybacks could trigger a short-squeeze, as more than 20% of the outstanding shares are held by short sellers.

Recommendations for investment houses

8/10/2021 Oppenheimer - $25

Risks

1) Adaptation of audio technology by whales (global companies)

Twitter and other global social networks have already adapted social audio app technology. But since the idea is short-term, the current state of the company is more important in this context, as well as the near-term expected growth of the business, namely the growth of active users reflecting revenue and EBITDA growth.

2) Additional increase in the supply of shares by means of Rule 144.

Together with the public shares, the company has authorised a much larger number of shares (just under 150 million in total compared with 18.6 million outstanding). Those shares that are not outstanding are restricted and therefore cannot simply be sold on the market. But under Rule 144, currently in force, a person (an insider) who has held restricted securities for at least six months has the right to sell restricted securities without registration, but will have to comply with one of two conditions when selling the shares:

  • 1% of the number of ordinary shares outstanding, which would be approximately 1,184,961 class A shares
  • and the average weekly trading volume of the shares during the four calendar weeks preceding the date of submission of the sale notice to the SEC.

That is, holders of restricted shares can sell them on the open market in limited quantities. The realisation of this risk could create a negative feedback loop.

Additionally: for short-term investment ideas, option volumes are interesting - they allow you to discern the sentiment of option traders. In this case, the open interest in call options is 3 times higher than the open interest in put options. The most liquid options are those with an expiry date of the 14th of April 2022 - hence our investment term. The share buyback is expected to be exercised by the 21st of May 2022. In that case, investing in April calls means that the investor expects the shares to be redeemed before the expiration date. For less risk, an investor may consider less liquid options expiring after the expiry date of the share buyback, but then, because of the reduced liquidity, there is a risk of not getting the options at the right price or getting them at a higher, unprofitable price.

Source: market chameleon


Conclusion

If the company's growth assumptions are correct, Yalla today is a cheap, high-margin, fast-growing company with a healthy balance sheet. Bonus triggers are expected buybacks with a deadline of the 21st of May. A high short float (>20%) could serve as additional fuel for the price increase once the company starts buying back shares.

* Subject to appropriateness test.

How to take advantage of the idea?

  1. Buy Yalla Group Ltd. shares at $6.55.
  2. Allocate no more than 2% of your portfolio to buying. You can use our analysts' recommendations to build a balanced portfolio.
  3. Sell when the price reaches $12.

How to Buy YALA Group Limited?

If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.

After opening an account, you can buy shares in either of the following ways:

Freedom24 Web Platform: In the Web Terminal section, type YALA.US (YALA Group Limited ticker in the NYSE) in the search box, and select YALA Group Limited in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.

Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type YALA.US (YALA Group Limited ticker in the NYSE) and select YALA Group Limited in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.


Buy Yalla Group Ltd. Shares >>


*Additional information is available upon request. Investment in securities and other financial instruments always involves risks of capital loss. The Client should make himself aware at his own accord, including to familiarize himself with Risk Disclosure Notice. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Commissions, fees or other charges can diminish financial returns. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and do not constitute an investment advice service. The recipient of this report must make their own independent decisions regarding any securities or financial instruments mentioned herein. Information has been obtained from sources believed to be reliable by Freedom Finance Europe Ltd or its affiliates and/or subsidiaries (collectively Freedom Finance). Freedom Finance Europe Ltd. do not warrant its completeness or accuracy except with respect to any disclosures relative to the Freedom Finance Europe Ltd. and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated.



  • Sources of information

    https://ir.yallatech.ae/

    https://marketchameleon.com/

    https://insights.frost.com/tv_top50technologies2021?campaign_source=FrostWebsite

    https://app.quotemedia.com/data/downloadFiling?webmasterId=101533&ref=116243700&type=PDF&symbol=YALA&companyName=Yalla+Group+Limited+American+Depositary+Shares+each+representing+one+Class+A&formType=6-K&dateFiled=2021-11-10&CK=1794350

    https://www.prnewswire.com/news-releases/yalla-group-limited-announces-up-to-us150-million-share-repurchase-program-301296795.html

    https://marketchameleon.com/Overview/YALA/OptionSummary/

  • Recommendation evaluation methodology according to Market Research Terms of Use
    Freedom Finance analysts perform a three-stage analysis. They select a promising industry based on the latest news, statistics and industry-specific metrics. They assess the supply and demand situation and its future development dynamics. Industry’s investment attractiveness is mostly affected by the forecasted market growth rates; total addressable market, player concentration level and likeliness of a monopoly formation, as well as the level of regulation by various entities or associations.

    The assessment is followed by the comparative analysis based on the selected sample. The sample comprises companies with a market capitalization of over USD 1 billion, but there is space for exceptions (when the suitable level of liquidity for company’s securities is available on the stock exchange). The selected companies (peers) are being compared against each other based on multipliers (EV/S, EV/EBITDA, PE, P/FCF, P/B), revenue growth rates, marginality and profitability (operating income margin, net income margin, ROE, ROA), and business performance.

    Having completed the comparative analysis, the analysts carry out a more in-depth research of the news about the selected company. They review company’s development policy, information about its current and potential mergers and acquisitions (M&A activity), and assess the efficiency of company's inorganic growth and other news about it over the past year. The main objective at this stage is to identify the growth drivers and evaluate their stability, as well as the extent of impact they have on the business.

    Based on all the data collected, the analysts determine the weighted forecasted figures of company’s growth rates and proposed business marginality, which are used to calculate the company’s multiplier-based estimated value. The said value enables setting the stock price target and stock value growth potential.

    The expected timing of the idea implementation is set depending on the current market situation, volatility level and available forecasting horizon for industry and company development. The forecasting period is normally set between 3 and 12 months.