YY Inc. (YY): Best Revolutionary Stock #10

By Timothy Lutts, Analyst, Cabot Stock of the Month
From Cabot Wealth Advisory 9/23/13 Sign up for free Cabot Wealth Advisory

Now it’s time for the FINAL feature of my Best Revolutionary Stocks. If you’re new to the series, I highly recommend reading the background info here.

The final candidate is YY Inc. (YY).

Here’s what I wrote about YY when I recommended it as Cabot Stock of the Month in late July.

“When I was a kid, five decades ago, the image I had of China was of an army of drab green Mao jackets, marching in unison, while children went hungry. Today, judging by the content of YY, China is an army of teenagers, sitting alone in their bedrooms and singing or talking into their computers, while stuffed animals look on in the background.

“Neither image, of course, is right; China has always been a diverse country. But its transformation in recent decades from communism to a new breed of capitalism has been stunning, and I’m confident there’s much more progress ahead. And this is what makes YY interesting; until now, it’s been possible to describe Chinese companies by naming the American equivalent: Baidu is the Google of China; Ctrip is the Expedia of China, etc. But with YY, there is no equivalent. There’s nothing quite like it in the U.S.!

“The company describes its offering as ”a revolutionary rich communication social platform that engages users in real-time online group activities through voice, text and video. YY Client, the company’s core product, empowers users to create and organize groups of varying sizes to discover and participate in a wide range of online activities, including online games, karaoke, music concerts, education, live shows and conference calls.”

“The experience starts at http://global.yy.com, which offers links to numerous portals. YY’s Duowan.com is a game media website that supplies access to interactive gaming content. Its WeiChang is a mobile app that lets users sing karaoke (including real-time lyrics and musical accompaniment) then evaluate and rank the performance of others. Web-based YY is an extension of YY Client that allows users to access most of the company’s services using just a Web browser. And Mobile YY extends the website’s services to mobile devices.

“It’s all well presented, and it’s evolving fast, with the company’s managers continually striving to meet the demands of their audience while creating ways to grow revenues. In practice, this might mean figuring out how to present, support and improve karaoke videos, adding new games, creating new music channels and more.
“The company is young, just five years old, and business is booming. Revenues in 2011 were $50 million. In 2012, they were $130 million. This year, more than $200 million seems certain. Online games have been the leading source of revenues so far, but advertising is catching up as the audience grows, while music sales are third.

“Turning to the stock, it’s young; YY just came public in November! But it’s already gained a lot of fans for a Chinese stock, including Citigroup, which projected annual growth of 91% for revenues and 117% for net income from 2011 through 2014, and Deutsche Bank, which upgraded the issue to buy in early May, noting that “YY has managed to gradually improve overall monetization while management proves strong execution skills.”

“In sum, YY has a great, mass-market growth story, with vast upside potential. Of course, it has risk, too. The risk is not particularly business risk; YY was fully vetted by the Nasdaq Exchange during its IPO process. The risk comes from both the earnings report, which is expected Thursday (August 2) after the market close, and the stock’s altitude, which you can judge by looking at the chart.

“YY is up 186%, year-to-date, and now sits roughly 27% above its 50-day moving average, and that’s potentially risky. One strategy with a stock like this is to buy a smaller than usual amount now, with the aim of adding to your position if the stock advances. Another is to wait until after earnings are reported and the 50-day moving average is closer—either the stock drops or the moving average catches up.

“In Cabot Stock of the Month, I like to keep it simple. I recommend buying now.”

At the time, the stock was trading at 40, and that’s worked out pretty well, as the stock is now hanging around 47. But a group of investors who did even better are those who subscribed to Cabot Top Ten Trader, which had recommend the stock on July 15 at 34. They’re already looking at profits of nearly 50%! As I said above, Cabot Top Ten Trader is your best source for early notice of hot young stocks. More information.