A growth stock with a price-to-earnings ratio of just 9.7! Should I buy Yalla?

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The price-to-earnings (P/E) ratio is a metric for valuing a company. The P/E ratio is calculated by dividing the stock price by the company’s earnings per share over the past 12 months. A low P/E ratio suggests that a company is cheap, while a high P/E infers that a company is expensive.

P/E ratios aren’t always comparable. For example, growth stocks will trade with a higher ratio than value stocks because they’re valued on future profitability.

But in Yalla (NYSE:YALA) — a Middle East-focused social media and gaming firm — I’ve found a growth stock with a P/E ratio of just 9.7. By comparison, Meta has a P/E ratio of 15, and that’s among the cheapest in the sector.

So let’s take a closer look at Yalla, and why I’d buy this stock.

Still in growth mode

Yalla shares shot up after their listing in late 2020, reaching $40 a share in February 2021, up from $7 in November 2020. The company was demonstrating impressive growth during the pandemic, but missed its Q2 targets in 2021, and the share price plummeted.

The pandemic definitely contributed to the growth of the social networking and gaming business. But recent quarterly updates have highlighted that the business is continuing to grow after the pandemic.

Revenue for the quarter ending June 30 came in at $76.1m, nearly 10% above analysts’ estimates, and above the $72.3m achieved in the months until the end of March. Net income also rose to $20.4m, up from $18.4m achieved a year ago.  

Growth was attributed to the increase in the number of monthly active users (MAUs) and paying MAUs. There was a 35.6% year-on-year increase in MAUs to 29.9m and a 65.3% year-on-year rise in paying MAUs to 10.6m.

Approximately $52.7m was generated from chatting services, while gaming revenue came in at $23.3m. 

Healthy balance sheet

I’m not worried about Yalla’s burn rate, because there isn’t one. The Dubai-based company has $384m in cash and equivalents, which is huge considering the market-cap is around $650m. Cash and cash equivalents actually grew year-on-year from $351m in 2021. Total current assets, including cash and cash equivalents, is $426m.

Yalla has said it is looking to refine the quality of its products while expanding its market. But that doesn’t appear to be having a negative impact on revenue or profitability. And that’s certainly a positive.

The huge cash balance is also particularly important right now as interest rates rise around the world. Higher interest rates increase the cost of growth, but this is something Yalla doesn’t need to worry about.

Risks

There are always risks when investing. With Yalla, it’s clear this relatively young tech company has found a niche and is expanding from there. But there’s no guarantee that larger tech firms won’t enter the market, especially when considering the profits Yalla is generating so early on.

And as economies become increasingly open, with restaurants and cafes getting back to normal, the environment is likely getting more challenging for it to deliver growth.

Despite this, I’m bullish on the stock. I’ve said the US market is almost uninvestable for me right now, given the weakness of the pound, but I’d make an exception for Yalla and its attractive valuation.

The post A growth stock with a price-to-earnings ratio of just 9.7! Should I buy Yalla? appeared first on The Motley Fool UK.

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James Fox has no position in any of the shares mentioned. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.