To The Moon

$Yalla Group(YALA)$

I recently added this stock to my portfolio watch list because I believe it has significant potential. It’s currently trading near its cash value, has a price-to-earnings (P/E) ratio of 5, and insiders own 43% of the shares.

The company in question is Yalla Group, primarily operating in North Africa and the Middle East. They specialize in social networks and gaming apps. What caught my attention is their impressive cash reserves: $569 million in cash and $135 million in long-term investments, totaling around $700 million. With only $1 million in debt, the company is essentially trading below its cash value.

Although revenue growth has slowed, it remains positive, and earnings per share (EPS) are surging. Cash flow is also showing strong development. After examining the company, I didn’t find any major issues.

Yalla Group is still a relatively small company with a market capitalization of $600 million. Their ecosystem revolves around two main areas: social and gaming. Social was historically their largest revenue driver, starting with Yalla, a popular group voice chat app with millions of downloads. They later launched Yalla Chat, similar to WhatsApp, and expanded into gaming, which is now a significant part of their business.

The company has faced criticism for bot activity in the past, so I focus less on user numbers and more on revenue growth. Notably, they’ve reduced marketing expenses, improving margins by 3%. While share-based compensation remains high due to developer hiring, dilution has stabilized over the years.

Revenue Growth

Revenue continues to grow, and the company’s cash reserves generate substantial interest and investment income—$28 million annually, which is significant for a $600 million company. This highlights their strong financial position, as they’re essentially trading at a 0.3 P/E ratio when factoring in their cash holdings.

For this value to be unlocked, the company needs to deploy its cash. While they don’t currently pay dividends or execute large share buybacks, insiders, who own 43% of the company, have a vested interest in driving shareholder returns. Management has hinted at future dividend payments and share repurchase programs.

Fundamental Analysis

The stock has under performed since its initial hype in Dubai, but it’s now trading at attractive levels. Its tangible book value is $4.20 per share, meaning it’s trading below tangible book value—a compelling opportunity for investors.

The tangible book value of this company is growing rapidly, while the share price remains flat. I don’t have a specific price target for the stock because so many variables could influence its trajectory. However, when valuing the business net of cash, the return becomes infinite—you’re essentially paying nothing for the business itself. Every dollar invested is backed by the cash the company holds, making it challenging to assign a traditional valuation net of cash.

If we assume the management starts paying a modest dividend, even at just 10% of earnings (around $0.70 per share), and grows at 5% annually, the P/E ratio will continually decrease. Additionally, if the company uses just a small portion of its earnings—say $30 million—for share buybacks, it would repurchase roughly 5% of shares annually without significantly impacting earnings. This would further enhance shareholder value while allowing their cash balance to grow significantly.

Free Cash Flow

Yalla Group's free cash flow margin remains strong, indicating the company's ability to generate substantial cash after capital expenditures. For a detailed breakdown of Yalla Group's cash flow statements, including operating cash flow, capital expenditures, and free cash flow, you can refer to their financial reports on Stock Analysis.

Risks & Challenges

One key risk is that revenue growth has slowed to around 5%. While not disastrous, it’s something to monitor. The company is still relatively small and heavily reliant on its Yalla app. If Yalla’s popularity declines and their newer games fail to gain traction, they may need to deploy their cash reserves for acquisitions or increased development efforts.

Valuation

However, the company is gradually diversifying its portfolio. As long as their product suite continues to expand, even modestly, the outlook remains positive. Operating in a highly localized market—focused on North Africa, the Middle East, and the Arabic-speaking world—they face limited competition.

With a P/E ratio of 5, a significant cash reserve, minimal net cash liabilities, high insider ownership, and a dominant position in a niche market, this stock offers an excellent risk-reward profile. The combination of a low valuation, strong cash position, and management’s alignment with shareholders through significant insider ownership provides a level of safety.

If the company begins rewarding shareholders modestly—not excessively—I think it’s reasonable to assume they can maintain a steady growth rate of 5%. I’m not expecting an acceleration in revenue growth or a significant decline, as they have a solid portfolio that will likely grow gradually over time. They may have a few standout successes, but for now, I’ll stick to a conservative estimate of 5% growth.

Now, if they repurchase just 5% of their shares annually, it wouldn’t be a substantial move given their current valuation. Remember, with a P/E ratio of 5, they could theoretically repurchase 20% of their shares each year without paying dividends or dipping into their significant cash reserves. Adding a 25% payout ratio (adjusted for taxes) at a 10x multiple would value the stock at $8.39 per share, compared to its current price of $3.90.

Optimistic Scenario

In a best-case scenario, the company uses a portion of its cash to buy back a substantial amount of shares—perhaps 20% annually for the next five years, followed by 10% per year afterward. With a gradual increase in valuation multiples, this could push the share price to $18 per share, which is a substantial upside.

Worst-Case Scenario

Even if earnings growth stagnates entirely for the next decade and they only pay a modest 25% dividend at a 5x multiple (close to current levels), the downside risk appears minimal. They would still retain their significant cash reserves, providing a solid financial cushion.

Conclusion

This is why I’m increasingly confident in this company. I believe it’s a good value up to $5 or $7 per share, and I’m buying heavily at the current price.

The fact that insiders own 20-40% of the company further reassures me that they’re motivated to reward shareholders over time. What do you think? Share your thoughts below, and have a great day!

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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