We’ve seen quite a bit of bifurcation among Chinese stocks since 2018, with quite a few like Tal Education (TAL) powering to new highs, and many others massively underperforming the market. Unfortunately, for Huya (HUYA) investors, the stock is in the latter group since 2018.

While the stock has managed to put up a 35% return thus far in 2019, it is still down more than 60% from it’s all-time high, and I don’t see it returning to this level any time soon. The most recent Q3 report confirmed what analysts were worried about, which was material deceleration. Worse, this deceleration in growth rates is expected to continue into FY-2020.

We continue to see investors scratching their heads when it comes to Huya’s sluggish performance, as the company has seen robust growth in annual earnings per share [EPS] since going public. Huya’s FY-2018 earnings per share came in at $0.32, FY-2019 annual EPS is expected to come in at $0.45, and FY-2020 EPS is expected to jump another 65% to $0.75 based on estimates. These are incredible numbers for a new company, and the company’s path to profitability is much quicker than the average tech IPO, which typically takes seven to see profitable EPS. While this trend in earnings is undoubtedly impressive, the one elephant in the room is the company’s sales growth.

While annual EPS continues to climb with monthly active users skyrocketing from 99.0 million last year to 146.1 million this year, sales growth is decelerating at breakneck speed. For growth companies, the most crucial metric is sales growth, and I believe this is what many of the bulls are missing in their evaluation of the company.

(Source: YCharts.com, Author’s Chart)

The most impressive growth in earnings comes from strong sales growth, and ideally, we want to see revenue growth rates accelerating and in an uptrend. The reason for this is that any company can generate positive earnings by adjusting line items like reducing G&A spend, or reducing marketing spend, but there is a limit to how much costs can be cut before earnings eventually come to a halt. Therefore, sales growth is the best predictor of sustainable growth in earnings as it allows a company to increase spending while staying profitable and reinvest in the business to stay competitive and hopefully gain market share. Unfortunately, for Huya investors, this is not the case at all.

(Source: YCharts.com, Author’s Chart)

As we can see from the above chart I’ve built, quarterly revenue growth rates has slid from triple-digit-levels in FY-2018, to high double-digit levels thus far in FY-2019. Huya managed to generate $317.3 million in sales in its Q3 2019 report, but this marked only 71% growth year-over-year. This translated to a sequential deceleration of 1600 basis points, and this trend is expected to continue as we head into FY-2020. As the above table shows, revenue estimates for Q4 2019 are currently sitting at $341.4 million which would mark only 56% growth, and Q1 2020 revenue estimates are pegged at $349.9 million, forecasting 44% growth. Currently, this is suggesting that we’re likely to see further 1000 basis points plus sequential deceleration in revenue going forward, with Q2 2020 dropping down to 31%. While estimates are not set in stone and Huya could beat on these numbers, it is going to need to beat on a massive scale to avoid deceleration. This is because in Q4 2019 alone, the company would need to report $363.9 million to avoid any material deceleration or 500 basis points or more. This is more than $22 million above the current estimates for $341.4 million, and the company will need next to a miracle to achieve this.

(Source: YCharts.com, Author’s Table)

It is important to note that the company’s growth rates still remain impressive, but they are in a downtrend, and this does not bode well for future earnings growth. In my experience, companies with decelerating revenue growth rates typically have a very hard time beating earnings estimates, and instead typically see downside surprises. For this reason, I believe Huya’s current estimates for $1.15 in EPS for FY-2021 and $0.75 in EPS for FY-2020 are presumptuous, and unlikely to be beat. To summarize, for investors in Huya hoping for a turnaround in the share price, they are going to want to see a minimum of $364 million in revenues for Q4, and $370 million in revenues for Q1 2020. While anything is possible, I would view this as highly unlikely.

As the below weekly chart of Huya shows, the company continues to trade in a range between $19.00 and $27.00, but remains below all of its key moving averages. Until we see a reversal in this trend of decelerating growth rates, I do not think this stock is a Buy.

For those that are holding this stock, my advice would be to sell into rallies. While a breakout of this stock is possible at some point, I believe it’s highly unlikely while the stock is going through growing pains as it laps very challenging year-over-year comps, and deceleration continues quarter over quarter. Investors may be enamored by growth in monthly active users and earnings, but I think they’re looking at the wrong metrics.

(Source: TC2000.com)

HUYA shares rose $0.07 (+0.32%) in after-hours trading Tuesday. Year-to-date, HUYA has gained 39.41%, versus a 27.43% rise in the benchmark S&P 500 index during the same period.

About the Author: Taylor Dart

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...

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