Photo by Chris Liverani on Unsplash  

Yalla Group posted its Q4 earnings on Monday, with revenue coming in towards the top end of the company's guidance, although some investors were hoping for more. The Dubai-headquartered social networking and gaming firm registered year-on-year revenue and user growth, but increasing costs negatively impacted net income.

The company is now embarking on something of a transition as it seeks to return to the strong double- and even triple-digit growth of its first few years. But with mature products in the market, and a strong cash position, the transition appears low risk. That's why Yalla is a buy for more.  

Yalla Group (NYSE: YALA) is the largest MENA-based online social networking and gaming company, in terms of revenue in 2022. The Company operates two flagship mobile applications, Yalla, a voice-centric group chat platform, and Yalla Ludo, a casual gaming application featuring online versions of board games in the Middle East and North Africa (MENA) region. The share price has suffered since the pandemic, when tech stocks soared on the back of a changing social and macroeconomic environment, but also a surge in speculative investment.

The stock, which once traded as high as US$39, is now valued at less than US$4 a share. But I think that's a little unfair. Yalla has struggled to maintain its pandemic-era growth, but it has strong and stable revenue streams and is currently investing in a low-risk transition to generate more revenue from its gaming services. Let's take a closer look.  

In its Q4 report, Yalla posted a YoY increase in revenue from US$67.5 million in the fourth quarter of 2021 to US$75.1 million in the fourth quarter of 2022. This 11.2% growth was delivered through its strategy to enhance the monetization of its user base by drawing customers towards its paid-for services.

Yalla now boasts some 32 million average monthly active users (MAUs), an increase of 14% YoY. Meanwhile, quarterly paying users increased from 8.4 million to 12.4 million, representing an impressive 47.8% YoY growth. The company had placed the conversion of non-paying users to paying users at the center of its strategy to deliver greater returns for shareholders, and it’s been successful.

However, net income fell versus Q4 of 2021. Non-GAAP net income dropped from US$27.5 million in the fourth quarter of 2021 to US$21.7 million in the fourth quarter of 2022. This is primarily due to rising costs of revenues and higher R&D spending. Margins fell accordingly from an impressive 40.8% in Q4 of 2021 to 29% in Q4 of 2022.

Yalla Presentation  

In addition to monetizing existing users, Yalla is increasingly focusing its efforts on developing new revenue streams by expanding legacy offerings to new geographies and developing a new mid-to-hard-core gaming business. The Dubai-based company has completed the initial round of beta testing on its first two hard-core games for distribution in MENA.

The new mid-to-hard-core gaming segment naturally requires investment. In the fourth quarter, Yalla launched an internal studio for R&D in this area and the company says that most new hirers are in research and product development-based roles. Yalla also reiterated that it was searching for high-quality game studios for acquisition.

These costs, along with inflation, have contributed to rising costs and falling net income. However, this could be a short-term pain, as the new operations will hopefully drive revenue generation going forward.

This is particularly important as Yalla's flagship applications, Yalla and Yalla Ludo, may have reached maturity with regard to their lifecycle. Increased monetization of this application in the MENA region could be relatively fruitless. Yalla has more similarities to the big gaming companies in that it earns most of its money from user spending.

I'd also suggest this diversification effort is part of a low-risk transition. So, why is that? Well, revenue generation across the business remains strong, and while Yalla and Yalla Ludo may be maturing, they're still highly innovative and lucrative applications.

More importantly, Yalla is undertaking its diversification program from a very solid financial position. While many growth stocks need to borrow money to grow, which could be expensive with interest rates pushing upwards, Yalla is sitting on more than US$407 million in cash. That's up from US$351 million a year ago.

With no borrowing costs, the ability to earn interest on its deposits, and a market-leading position to leverage for future growth, Yalla is well-positioned to turn this short-term pain into a long-term gain. That's why I see Yalla as a 'buy'. This is reinforced by the fact that 68% of the market cap is backed by Yalla's cash or cash equivalents.

Yalla Presentation

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