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The livestreaming platforms operator is investing heavily in products linked to the metaverse and non-fungible tokens amid challenges for its main business.
Livestreaming platform operator Scienjoy Holding Corp. (NASDAQ:SJ) sees a future in all things virtual, even if investors don’t appear to share the vision. Such is life these days for one of the many companies trying to develop products linked to up-and-coming concepts like the metaverse and non-fungible tokens (NFTs) that are all the rage in tech chatrooms but still in their infancy.
Scienjoy’s revenue increased 27% year-on-year to 463.4 million yuan ($73.1 million) in the first quarter, according to its latest results published last Thursday. That growth may look decent, but there was one glaring red flag. The company’s base of paying users and active broadcasters both declined for the period, and consequently, its revenue growth slowed from more than 36% for the whole of last year.
Scienjoy runs mobile apps for professional streamers — or “broadcasters,” as the company calls them — who provide entertainment and interact with online viewers in real time. The company generates revenue primarily by allowing users to purchase virtual gifts to give to their favorite broadcasters, who get a cut of the money.
Scienjoy’s ability to post revenue growth in the face of declining user numbers means that spending per user is growing – a more positive sign of the company’s ability to squeeze more money from its existing user base. The company’s average revenue per paying user rose an impressive 46% year-on-year, thanks to an increase in high-quality content streamed on its platforms including Hongren, which it acquired in December.
Nevertheless, a shrinking user base can be alarming in an industry as competitive as China’s livestreaming market, which has exploded in recent years. The number of livestreaming users in the country more than tripled to 560 million by March 2020 from the end of 2018, according to data from the China Internet Network Information Center. That’s nearly twice the entire U.S. population and is probably still growing, fueled by millions of Chinese eager to follow their favorite broadcasters’ every thought and move online.
The industry is packed with more than 100 companies, even though the entry barrier is high because of costs required to set up and run such operations. And yet, only a handful of companies are dominating the space, led by ByteDance, the owner of TikTok and its Chinese equivalent, Douyin, as well as No. 2 player Kuaishou (1024.HK) (OTCPK:KUASF, OTCPK:KSHTY).
Amid such intense competition, a failure to retain viewers can be problematic. At the end of the day, Scienjoy can earn only so much more from remaining users to make up for the loss of revenue from defectors. And it’s a vicious cycle. A fall in viewers can lead to a decline in virtual gift sales, which could drive away broadcasters, making the platforms less attractive for viewers.
It also doesn’t help that the most popular streamers often have contracts with major platforms operated by the big players, leaving the second-tier hosts for smaller players like Scienjoy.
The challenges are pushing Scienjoy to look beyond its current business, including the metaverse, which burst into the public eye last year when Facebook changed its name to Meta (META) on its belief about the concept’s big potential. Scienjoy is spending heavily on developing products that enable streaming in such virtual worlds, which led to an 82% year-on-year increase in its operating expenses in the first quarter.
Scienjoy is also eyeing NFTs, a hot cousin of Bitcoin (BTC-USD), which are another type of digital asset. The company has engaged in a flurry of activities to beef up this new business lately. It acquired an NFT company at the start of the year. And in May, it formed a strategic alliance with MetaU, a crypto exchange operator, to help Scienjoy provide funding for artists to convert their work into NFTs. Last month, the company even hosted an exhibition of NFT art in New York.
The metaverse is all the rage now, so it makes sense for Scienjoy to look to that for future growth outside the overheated livestreaming space. The possibilities for livestreaming applications in the metaverse, including those involving NFTs, seem limitless. For instance, avatars interacting with their fans and selling NFT items in fantastic virtual environments would be pretty cool.
“We are very excited about the NFT platform, live streaming metaverse and artificial intelligence broadcasters and they are going to be very entertaining for users in the future, though they are already existing in the digital world in some forms,” Victor He, chairman and CEO of Scienjoy, said in an interview with Phoenix Television in November. “The NFT art and metaverse in the gaming and entertainment world are going to be more compelling and significantly attractive to users than ever.”
But the concept is also highly abstract for average Joes. A lot of ordinary investors may have a hard time wrapping their heads around what Scienjoy’s potential new products may look like. And they also may care more about the company’s current bottom line, which is taking a hit from its hefty investment in metaverse and NFT projects. The company is profitable, posting 83.2 million yuan in net income in this year’s first quarter. But the figure was up just 17.3% year-on-year, well below the company’s 27% revenue growth for the period.
So, it’s not a huge surprise that the company’s stock fell more than 2% the day it reported its first quarter results, although the shares mysteriously rallied 18% the previous day.
Scienjoy has grown fast, but its shares are worth less than a third of what they fetched in its 2019 IPO using a special purpose acquisition company (SPAC). The stock now trades at a lowly price-to-earnings (P/E) ratio of less than 4 and at an even humbler price-to-sales (P/S) ratio of less than 0.5, based on its 2021 revenue. By comparison, the money-losing Kuaishou trades at a higher but hardly awe-inspiring P/S ratio of about 4.
Such low valuations indicate investors are lukewarm about streaming companies in general, despite the huge popularity of their services. And it’s pretty clear that Scienjoy’s bet on the metaverse and NFTs isn’t making investors change their minds about the company – at least not yet. It will probably need to show some new products, and also prove that people will pay for them, to convince investors of the potential of its metaverse and NFT initiatives.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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