On July 12 of this year, the International Olympic Committee announced that it will cooperate with the Saudi Olympic Committee to hold the first esports Olympics in Saudi Arabia in 2025. Just when the whole world was amazed by the "game into the Olympics", many people were surprised to find that in just a few years, Saudi Arabia and its North African region had become a globally watched e-sports and gaming hotbed. In this market opportunity, Yalla Technology, which deeply cultivates the Middle East and North Africa, may be able to take advantage of this trend and emerge from the shadow of continued stock price declines.

It is learned from the Zhitongcaijing APP that Yalla Technology (YALA.US) released its 2024 Q2 quarterly report before the opening on August 13. The data shows that the company's Q2 revenue increased by 2.5% YoY to US$81.2 million, significantly higher than the market's previous expectation of US$79 million. The company's net profit for the period was US$31.4 million, a YoY increase of 10.9%.

However, this performance did not trigger investors' positive feedback. After the financial report was released, Yalla Technology's stock price continued to fall on the same day, ultimately dropping by 1.55%, and the stock price trend did not improve the next day after the financial report was announced, but continued to decline by 0.79%. The stock price finally settled at $3.77.

"Big spenders" lost, cost control increased.

Yalla Technology's stock performance now leaves many investors sighing. In fact, since landing on the US stock market in September 2020, Yalla Technology has been favored by investors for its good performance in the instant messaging and mobile gaming business in the Middle East region, and its stock price has continued to climb, from the initial $9.75 to a high of $41.35 on February 11, 2021. This is also Yalla Technology's highest stock price on the secondary market at present.

However, its stock price subsequently plummeted, falling to $17.7 within a month, and in the following year of 2022, Yalla Technology's stock price dropped by 47.92%, with the stock price bottoming out at only $3, a drop of 92.9% from its highest point. Although Yalla Technology's stock price rose 75.14% in 2023 thanks to the warming of its social and gaming business, its performance in 2024 was once again lower than market expectations without the boost of a "low base" performance. From the beginning of the year to the present, the company's stock price has fallen by 38.50%.

Since Yalla Technology went public, the rapid changes in market sentiment have been reflected in its stock price, which vividly illustrates investors' uncertainty about Yalla Technology's future valuation. The fundamental reason for this is that Yalla Technology's growth in the local market falls far short of its expectations as a self-proclaimed "Middle East Tencent".

From the Q2 financial report disclosed this time, Yalla's Q2 performance growth is obviously higher than market expectations. This is because this year's most important "Ramadan" in the Middle East began on March 11. By comparison, Ramadan 2023 did not start until March 23. Influenced by this traditional festival, local social and entertainment will be affected to a certain extent. An earlier Ramadan reduced the impact on Yalla's Q2 performance, enabling it to continue to achieve better-than-expected double-digit revenue and profit growth. According to Yalla's expectations for the previous quarter, its revenue for the period up to June would reach between US$72 million and US$79 million. Today, its Q2 business performance is significantly better.

From the perspective of key operating data, the company's current average MAU is 38.999 million, a YoY increase of 14.1%; but the number of platform paying users decreased by 10.3% YoY to 12.023 million. The average revenue per paying user in Q2 quarter of the company increased by 13.8% YoY to US$6.6.

Based on Yalla's current operating data, investors can easily see that the overall growth rate of paying users has declined compared to the growth rate of MAU. This indicates that Yalla's Q2 quarterly market strategy mainly focused on improving user payment conversion, by increasing user payment rates to improve the company's revenue level. This is also why its revenue can maintain positive growth even in the face of a two-digit decline in paying users.

From the cost side, generally speaking, gaming companies in the Middle East and North Africa, due to factors such as Ramadan, will generally conduct marketing and purchase promotion to maintain stable business growth in the Q2 quarter. Yalla is no exception. However, its current sales expense is US$8.492 million, a YoY decrease of 31.4% compared to the same period last year, and the proportion of marketing expenses to total revenue has also decreased from 15.6% in the same period last year to the current 10.5%. In addition, the company's current management expenses and R&D expenses have also decreased by 5.5% and 1.6% YoY, respectively.

In the current increasingly fierce social and gaming markets in the Middle East and North Africa, cost control and marketing promotion strategies, which are more restrained, may indicate that Yalla is primarily seeking to "protect its profits" rather than "seek growth" this quarter. Indeed, due to its strong cost control strategy, Yalla achieved US$31.4 million in net profit, a YoY increase of 10.9%, despite only single-digit revenue growth.

"Middle East Tencent" can it rise again? As mentioned above, the reason why Yalla Technology was called the "Middle East Tencent" years ago was that its social + gaming combination strategy was strikingly similar to Tencent when it was initially growing. At that time, the market expected that as long as the social and gaming markets in the Middle East and North Africa continued to expand, Yalla only needed linear growth to become the "Middle East version of Tencent".

As expected by the market, after four years, the size of the Middle East and North Africa market continues to rise, but the market competition that comes with it seems to have interrupted Yalla's linear growth dream.

At this Q2 earnings conference, Yalla CEO Yang Tao said, "Since the end of last year, we have joined hands with high-quality local and global partners to hold a series of Yalla Ludo online and offline championships in many places in the Middle East and North Africa, attracting millions of players to participate." Getting closer to esports is an important part of Yalla's dynamism since the first half of this year. Combined with industry trends such as Saudi Arabia hosting esports Olympics, it has significant significance as a wind direction indicator.

From the market perspective, according to market research company Niko Partners' latest report, the size of the Asia, Middle East, and North Africa (MENA) gaming market will reach $85.5 billion in 2023, a year-on-year increase of 4.6%. The company predicts that by 2027, MENA-3 revenue will grow to $2.65 billion, with a five-year compound annual growth rate (CAGR) of 8.2%. In 2023, the total number of players reached 68.4 million, a year-on-year increase of 2.9%. It is expected to reach 79.6 million by 2027, with a five-year compound annual growth rate of 3.7%.

In terms of market competition, with the participation of giants such as Tencent, miHoYo, and Lilith, the categories of games in the Middle East market have become more diverse. Chinese games occupy eight seats in the TOP 10 list of the Saudi Arabian App Store, demonstrating China's competitiveness in the gaming market. At the same time, companies such as Yalla, which have been laying out in the Middle East and North Africa for a long time, are facing huge competitive pressure.

For Yalla at this time, conforming to the trend of local esports development and expanding its products to a broader market through the esports track is a feasible strategy.

From the policy perspective, the United Arab Emirates and Saudi Arabia play a leading role in promoting local esports development. Under the guidance of the Crown Prince of Dubai, the Dubai Electronic Gaming Blueprint 2033 has a clear goal: to shape Dubai into one of the top ten esports cities in the world by 2033, with an expected increase of 30,000 job positions and a direct contribution of 1 billion US dollars to GDP, demonstrating a grand economic transformation blueprint.

The Saudi Public Investment Fund has established Savvy Gaming Group and planned to build the world's largest game development center in the future city of Neom.

In the market, Asia, the Middle East, and North Africa together occupy more than half of the global esports market, accounting for more than 56%. According to the research of the 2023 Middle East and North Africa Games and Esports Summit, the Middle East has built a huge community with more than 0.377 billion active players.

Compared to its peers who are still fighting for territory in the local gaming market, Yalle's bet on the esports industry has already won it a first-mover advantage. If it can establish a foothold in the local esports market in the future, this "Middle Eastern Tencent" may be able to rise again.