Promising Earnings Could Mark a Bottom in This Company
Y Inc. (Nasdaq: YY) is a social platform that engages users in real-time online group activities through voice, video and text on personal computers and mobile devices. The company’s segments include YY IVAS and others, Huya broadcasting, and 100 Education.
YY enables users to create and organize groups of varying sizes to discover and participate in a range of online activities, including music shows, online games, dating shows, live game broadcasting and e-learning. YY offers users an entertainment experience through its social community.
It owns the domain names of YY.com, Duowan.com, 100.com, Huya.com, Edu24ol.com and Zhiniu8.com.
Mr. David Xueling Li, Chairman and Chief Executive Officer of YY, recently announced earnings and commented, “After we successfully completed the acquisition of BIGO in March, the second quarter was the first time we had the full quarter consolidation of the financial performance of BIGO.
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In the second quarter, our global average mobile MAUs reached 433.5 million, of which the average mobile MAUs of global short-form video services increased by 431.2% year-over-year to 90.3 million, and the average mobile MAUs of global live streaming services increased by 39.2% year-on-year to 140.9 million.”
Traders seemed pleased with the news.
The Chairman continued, “More importantly, average mobile MAUs of our instant messaging platform IMO had reached nearly 211.9 million. Our massive and diverse user base offers us a great opportunity for the synergy and future monetization.
During the second quarter, we further enhanced the stickiness of IMO users by introducing short-form video content into IMO. About 17.5 million monthly users in more than 40 countries were able to access to the short-form video content on IMO.
We were pleased to see that the conversion rate to short-form video users had reached to over 50%. In addition, we also continued to bolster the foundation of our global ecosystem by enhancing our AI technologies and cultivating our localization capabilities.
Going forward, as we continue to refine the synergies between our business segments and launch new monetization venues on a global scale, we are confident of achieving our vision of connecting people and enriching their lives through video.”
Mr. Bing Jin, Chief Financial Officer of YY, further commented, “We once again achieved strong financial and operating performances in the second quarter of 2019, highlighted by rapid growth and sustained profitability.
Our total net revenues in the second quarter of 2019 increased by 66.8% year over year to RMB6,295.2 million, exceeding the high end of our previous guidance range. The increase in net revenues was primarily driven by a 66.4% year-over-year increase in live streaming revenues to RMB5,922.8 million.
The consolidation of Bigo fueled additional user and revenue growth. Looking ahead, we will continue to enhance content offerings and develop AI technologies across our products on a global scale, and we are confident that our instant messaging and short-form video businesses will become the next dual growth engines for the group and further drive our global expansion.”
This news could mark an important bottom as the stock tests long term support.
A Trade for Short Term Bulls
As with the ownership of any stock, buying YY could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for YY
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For YY, the September 20 options allow a trader to gain exposure to the stock.
A September 20 $55 call option can be bought for about $3.04 and the September 20 $60 call could be sold for about $1.15. This trade would cost $1.89 to open, or $189 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $189.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in YY the maximum gain is $3.11 ($60 – $55 = $5; $5 – $1.89 = $3.11). This represents $311 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $189 to open this trade.
That is a potential gain of about 164% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.