We recently compiled a list of the 10 Best Middle East and Africa Stocks To Buy According to Analysts. In this article, we are going to take a look at where Yalla (NYSE:YALA) stands against the other Middle East and Africa stocks.
MENA’s Economic Outlook for 2024 and the Rising Interest in Private Equity and Venture Capital Investments
According to the Middle East and North Africa Economic Update report published by the IMF in April 2024, the Middle East and North Africa (MENA) region will experience modest growth of 2.7% in 2024, up from 1.9% in 2023. Both oil importers and exporters in the region are expected to grow at similar rates in 2024. The forecasted growth difference between the Gulf Cooperation Council (GCC) economies and developing oil importers (excluding Egypt) is nearly 1%. GDP per capita is expected to rise by just 1.3% in 2024, driven almost entirely by the GCC economies. The impact of ongoing conflicts has ceased economic activity, particularly in Palestine. In Gaza, economic activity has nearly dropped by 86% in the fourth quarter of 2023 compared to the same quarter in 2022. The Palestinian economy’s outlook remains highly uncertain, heavily dependent on the conflict’s progression. The disruptions in maritime transportation, particularly through the Suez Canal, affected both regional and global trade.
Over the past decade, most MENA economies have seen increases in their debt-to-GDP ratios as MENA oil importers struggle to reduce their debt-to-GDP ratios due to high oil prices. Additionally, oil importers have been unable to lower their debt-to-GDP ratios through inflation, mainly due to exchange rate fluctuations and off-budget factors, known as stock-flow adjustments, highlighting the need for greater debt transparency. On the other hand, for MENA oil exporters, periods of high GDP growth are typically associated with smaller increases in nominal debt stocks, leading to a slower rise or even a decrease in the debt-to-GDP ratio.
However, interest in private equity (PE) and venture capital (VC) has been surging in the Middle East and Africa, reflecting a notable shift in investment preferences within the region. According to recent data, provided by Preqin, in collaboration with the Dubai International Financial Centre (DIFC), approximately 65% of investors in the region are either planning to maintain or increase their exposure to private equity this year. Similarly, 56% of investors are keen to do the same with their venture capital investments. This growing interest is partly due to the region’s historical under-investment combined with an optimistic outlook on the regional economic and market conditions.
Despite challenges due to geopolitical tensions, venture capital remains a critical component of the investment ecosystem. The sector is expected to recover as it adapts to the current economic conditions. In the Middle East, investor sentiment towards VC and PE is generally positive. A significant portion of regional investors have reported that their PE and VC investments have met or exceeded expectations. Sectors such as fintech, technology, healthcare, and infrastructure are particularly attractive to investors.
The Middle East and North Africa region is poised for a modest economic recovery in 2024, however, geopolitical tensions and conflicts continue to pose significant challenges. As MENA economies navigate through fluctuating global conditions and regional disruptions, the interest of private equity and venture capital investors reveals the region’s promising outlook for investors and economic stakeholders.
Our Methodology
For this article, we used Finviz and Yahoo Finance stock screeners plus online rankings to compile an initial list of the 40 largest companies in the Middle East and Africa by market cap. From that list, we narrowed our choices to the 10 stocks that analysts see the most upside to. The list is sorted in ascending order of analysts’ average upside potential, as of August 23. We also included the market cap of the companies as of August 23. The list is sorted in ascending order of their average upside potential as of August 23.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An aerial view of Dubai, the 2016 epicenter of the technology industry.
Yalla (NYSE:YALA)
Upside Potential: 42.86%
Market Cap: $638.14 Million
Yalla (NYSE:YALA) is based in the UAE and operates a social media and gaming platform that caters primarily to users in the Middle East and North Africa (MENA) region. The company’s platform, Yalla, allows users to engage in voice chat rooms and participate in online games, making it a popular choice among young users in the region. Yalla (NYSE:YALA) has grown rapidly and positioned itself as a key player in the region’s digital landscape. Yalla (NYSE:YALA) has reported impressive growth since its inception in 2018, with revenue increasing to approximately $319 million by the end of 2023, reflecting a compound annual growth rate (CAGR) of about 50%. The company has maintained strong operating profit margins, averaging 25% over five years, and has built a net cash position of over $500 million.
In Q2, Yalla (NYSE:YALA) reported a revenue of $81.2 million, a 2.5% increase from the previous year, driven by an expanding user base and improved monetization strategies. The company saw a significant rise in Average Revenue Per User (ARPU), which climbed from $5.8 to $6.6 year-over-year. Yalla (NYSE:YALA) effectively managed its costs and expenses, which decreased by 6.8% to $51.6 million, while maintaining the stable cost of revenues at 35.7%. Selling and marketing expenses dropped by 31.4% due to a more disciplined approach to advertising, and general and administrative expenses fell by 5.5%. Operating income increased by 23.8% to $29.6 million. Additionally, the company benefited from higher interest income, which rose to $7.1 million due to increased interest rates on bank deposits. Despite a significant rise in income tax expenses, owing to the implementation of the UAE’s Corporate Tax Law, Yalla’s (NYSE:YALA) net income improved by 10.9% to $31.4 million. Overall, Yalla (NYSE:YALA) demonstrated robust financial performance, highlighting its strong revenue growth, cost efficiency, and enhanced profitability.
Yalla’s (NYSE:YALA) management expressed confidence in the company’s future outlook during the Q2 2024 earnings call. They highlighted the strong and stable performance of their flagship applications, Yalla and Yalla Ludo, in Q3 2024, with expectations that Q3 could outperform Q2. The company is focused on improving operating efficiency, as evidenced by the Yalla Ludo team’s efforts to organize offline tournaments across different cities in the MENA region, enhancing brand impact and market penetration. For the remainder of 2024, Yalla (NYSE:YALA) expects to maintain its solid performance with continued improvements in efficiency. In terms of new product development, the company is dedicating more resources to self-developed mid-core games, with three such games currently in the pipeline. Testing is expected to begin by the end of the year, with further iterations based on user feedback before large-scale promotions are initiated.
The MENA social media market is projected to grow from $41 billion in 2024 to $59 billion by 2029. Despite this promising outlook, challenges such as competition from global giants such as Meta, TikTok, Snapchat, and LinkedIn, add pressure to its growth prospects. Yalla (NYSE:YALA) is actively exploring new monetization strategies, including premium membership models and advertising. The company’s ability to introduce innovative features and services that resonate with its users will further enhance its revenue-generating capabilities. Additionally, Yalla’s large and growing user base presents an attractive opportunity for advertisers looking to target the MENA region. Yalla (NYSE:YALA) is also exploring opportunities outside the Middle East, with a focus on markets like South America, though the Middle East remains their primary market due to their strong competitive advantages there. Additionally, the company is committed to repurchasing shares and is open to exploring new initiatives that align with its core businesses and the MENA culture.
Yalla (NYSE:YALA) has the potential to form strategic partnerships with telecom operators, media companies, and other digital platforms in the MENA region. Such alliances could enhance its distribution network, improve user acquisition, and lead to co-branded offerings. Yalla (NYSE:YALA) deep understanding of the cultural and linguistic nuances of the MENA region gives it a competitive edge. The company tailors its platforms to suit local preferences, making them more appealing to the target audience. Yalla (NYSE:YALA) is well-positioned to continue its growth trajectory, driven by its leadership in the MENA region, strong financial performance, diversified product offerings, and strategic focus on cultural adaptation. With expanding monetization opportunities and the potential for strategic partnerships, Yalla presents a compelling investment opportunity for those looking to tap into the digital transformation of the MENA region.
Yalla (NYSE:YALA) is trading 5.56 times its earnings, which is a 58.40% discount compared to the sector median of 13.37. In the second quarter, Yalla’s (NYSE:YALA) stock was held by 4 hedge funds with stakes worth $4.12 million. Renaissance Technologies is the largest shareholder in the company with a stake worth $2.16 million as of June 30. Industry analysts have a consensus on the stock’s Buy rating, setting an average share price target at $5.70, which represents a 42.86% upside potential from its current level.
Overall YALA ranks 6th on our list of the best Middle East and Africa stocks to buy according to analysts. While we acknowledge the potential of YALA as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than YALA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.