I’m often on the lookout for cheap shares. But what is a cheap share? When it comes to valuing a company I, like other investors, use a range of metrics to help me determine how much I think a stock should be worth.
Today, I’m looking at Yalla Group (NYSE:YALA) — a leading voice-centric social networking and entertainment platform in the Middle East and North Africa. It’s a stock I’ve been keeping an eye on for some time, and one that I’m finally adding to my portfolio after three consecutive quarters of revenue growth.
What makes Yalla cheap?
Yalla is a profit-making growth stock. Earlier this week, it announced revenue for the third quarter was $80.1m, the first time quarterly revenue has surpassed $80m. However, profit fell to $24.4m, down from $25.3m in the third quarter of 2021, although this was largely due to more spending on customer acquisition.
But what really interests me about this one is its metrics. The stock has a forward price-to-earnings (P/E) of 6.3 versus a communications sector average of 15. It has a price-to-book ratio of 1.4 versus the sector median of 1.71.
And the really attractive bit comes when we look at enterprise value (EV), which measures a company’s total value, taking into account the firm’s net debt or cash position. The thing is Yalla Group had cash and cash equivalents of $391.2m at the end of Q3. The difference between its market-cap $610m and cash and cash equivalents is only $220m.
As a result, Yalla Group looks seriously cheap when we looking at EV-based metrics. The stock has a EV-to-EBITDA ratio of just 2.2 versus a sector average of 9.7. It also has an EV-to-sales ratio of 0.72 versus a sector median of 1.95.
Steady growth
While many soft tech companies are struggling, Yalla is continuing to grow. Revenue has now risen for three consecutive quarters after a small downturn at the end of the pandemic.
The company’s revenue, and share price, surged during the pandemic as Covid restrictions pushed people towards the virtual. But Yalla’s 2022 growth is testament to the strength of its product and its market positioning.
In fact, its worth noting that while the global economy is going into reverse, the Middle East isn’t. World Bank economists forecast that the Middle East and North Africa (MENA) region will grow 5.5% in 2022 — the fastest in six years.
I appreciate that there’s a matter of competition. Yalla has found something of a niche so far, but social media giants could well move into this space. And that’s something I’ll keep an eye on.
But, for now, I’m impressive by Yalla’s 2022 performance and I’ll be adding this stock to my portfolio.
