P/E ratios aren’t always comparable. For example, growth stocks will trade with a higher ratio than value stocks because they’re valued on future profitability.

But in Yalla (NYSE:YALA) — a Middle East-focused social media and gaming firm — I’ve found a growth stock with a P/E ratio of just 9.7. By comparison, Meta has a P/E ratio of 15, and that’s among the cheapest in the sector.

So let’s take a closer look at Yalla, and why I’d buy this stock.

Still in growth mode

Yalla shares shot up after their listing in late 2020, reaching $40 a share in February 2021, up from $7 in November 2020. The company was demonstrating impressive growth during the pandemic, but missed its Q2 targets in 2021, and the share price plummeted.

The pandemic definitely contributed to the growth of the social networking and gaming business. But recent quarterly updates have highlighted that the business is continuing to grow after the pandemic.

Revenue for the quarter ending June 30 came in at $76.1m, nearly 10% above analysts’ estimates, and above the $72.3m achieved in the months until the end of March. Net income also rose to $20.4m, up from $18.4m achieved a year ago.  

Growth was attributed to the increase in the number of monthly active users (MAUs) and paying MAUs. There was a 35.6% year-on-year increase in MAUs to 29.9m and a 65.3% year-on-year rise in paying MAUs to 10.6m.

Approximately $52.7m was generated from chatting services, while gaming revenue came in at $23.3m. 

Healthy balance sheet

I’m not worried about Yalla’s burn rate, because there isn’t one. The Dubai-based company has $384m in cash and equivalents, which is huge considering the market-cap is around $650m. Cash and cash equivalents actually grew year-on-year from $351m in 2021. Total current assets, including cash and cash equivalents, is $426m.

Yalla has said it is looking to refine the quality of its products while expanding its market. But that doesn’t appear to be having a negative impact on revenue or profitability. And that’s certainly a positive.

The huge cash balance is also particularly important right now as interest rates rise around the world. Higher interest rates increase the cost of growth, but this is something Yalla doesn’t need to worry about.

Risks

There are always risks when investing. With Yalla, it’s clear this relatively young tech company has found a niche and is expanding from there. But there’s no guarantee that larger tech firms won’t enter the market, especially when considering the profits Yalla is generating so early on.

And as economies become increasingly open, with restaurants and cafes getting back to normal, the environment is likely getting more challenging for it to deliver growth.

Despite this, I’m bullish on the stock. I’ve said the US market is almost uninvestable for me right now, given the weakness of the pound, but I’d make an exception for Yalla and its attractive valuation.

Growth and technology stocks can appear much more expensive as they’re valued on future growth expectations. I actually had no exposure to such stocks at the beginning of the year. Generally I thought they’d become far too expensive.

Tesla is the perfect example of this. At it peak share price, it had a price-to-earnings (P/E) ratio of around 230. That means it would have taken 230 years for the company’s profits to cover the value of its shares.

But as prices fall, growth stocks are becoming more attractive to me. Here are my top picks to buy before June.

NIO

NIO (NYSE: NIO) fell 8.5% yesterday, but other growth stocks dropped too. The Chinese EV manufacturer is on an impressive growth curve, with revenue increasing at a similar rate to market leader Tesla. The Shanghai-based company has a market cap of just $22bn, a fraction of Tesla’s $650bn.

While NIO doesn’t expect to become profitable until 2024, other metrics, such as price-to-sales (P/S), highlight why I think NIO is great value compared to its peers. The stock has a P/S ratio of around 4, versus 13 at Tesla. Lucid and Rivian have P/S multiples above 100.

Lockdowns in China might hurt growth this year. That’s definitely one concern. However, I like the brand, its EV offering, and its unique battery swapping technology.

Yalla

Yalla (NYSE:YALA) isn’t a typical growth stock as its already trading with fairly low multiples. It has a P/E ratio of just 7.7 and a P/S ratio of 1.8. The Middle East/North Africa-focused social media and gaming platform saw revenues rise rapidly during the pandemic, but growth has slowed. The stock plummeted in line with other growth stocks, but also as investors saw growth slowing.

Q1 2022 was its most successful quarter to date as revenue rose year-on-year from $67.6m to $72.3m. Average monthly active users (MAUs) reached 29.2m during the period — a 55.3% increase from Q1 of 2020.

Yalla has big plans for expansion and the cash to make it happen. For example, it has recently launched the region’s first-ever social metaverse app, WAHA. 

The slowing growth curve isn’t great to see, but I think this stock looks like great value. Investors will be keen to see whether growth can be sustained beyond the core pandemic years.

Darktrace

Darktrace (LSE: DARK) stock has bounced up and down since it was listed last year. The cyber-defence firm saw its share price fall last week as one of its executives was named in a legal row concerning Autonomy’s 2011 sale to Hewlett Packard. 

However, at around 330p, I think Darktrace looks like great value. Demand for cyber-security is on the rise amid increased global competition following Russia’s invasion of Ukraine. Revenue is rising and at today’s price, Darktrace has a P/S ratio of around 8. This is considerably cheaper than its peers, such as CrowdStrike at 23.

There’s plenty of concern about the competitiveness of the sector. But I see Darktrace continuing to grow amid increased demand for its services. It’s also trading near its all-time low.

However, that doesn’t mean I’m ignoring growth stocks. In fact, I’ve been digging deeper to find some with great long-term prospects for my portfolio.

Oriental Culture Holdings

I’ve had Oriental Culture (NASDAQ: OCG) in my watchlist for a while. As I write, the stock is trading below its IPO price, but this belies a strong showing in 2021. In its full-year results, released on Monday, it said that operating revenues increased 115.6% to $37.6m in the 2021 fiscal year. Gross profit rose to $35.2m in 2021, up from $14.8 million in 2020, representing 137.7% growth.

The company is a leading online service provider for the trade of artworks and collectibles. It experienced its impressive growth on the back of a resurgent Chinese market. In 2021, more revenue was generated from fine art sales in China than in the US, according to Artron, a Chinese art sector group. Revenue from fine art sales in China grew 43% to $5.9bn in 2021, with 63,400 pieces sold. The company is also moving into the non-fungible token space, which could prove lucrative in the future.

While I feel this is a great long-term pick for my portfolio, it’s worth considering the impact of continued Covid-19 lockdowns in China on the country’s art market.

Netflix

Netflix (NASDAQ: NFLX) tanked in April after the subscription service released disappointing Q1 figures. The report showed that subscribers are leaving Netflix’s streaming services in record levels and investors subsequently rushed for the exits. The stock fell 40% in a single day and is currently trading around $200 a share. That’s a massive fall from the $700 it was trading at in November.

Despite this, the company remains profitable. Net income during the quarter ended March 31 fell 6.4% to $1.6bn, down from $1.7bn the year before. But interestingly, Netflix said it would have seen 500,000 net additions during the most recent quarter if it wasn’t for the impact of shutting down its services to Russians. The winding-down of all Russian paid memberships resulted in a loss of 700,000 subscribers. 

Yalla Group

My final pick is Yalla Group (NYSE: YALA). The stock gained after its IPO in 2020 and went from strength to strength, reaching $39 a share amid the unique market conditions. But it started falling in early 2021. Currently, the social networking and gaming provider is trading at a little over $4 a share, so there’s plenty of headroom here.

The firm posted net income of $82.6m in 2021 compared with net income of $3.2m in 2020. That’s impressive, but growth has slowed. In fact, revenue actually declined in the final quarter of 2021. For me, Yalla will need to show evidence that it can get growth back on track. But it has an ambitious plan and enough cash to push forward. Yalla’s price-to-earnings ratio is around 10, which for a tech stock, makes it look pretty cheap to me. 

The Dubai-headquartered social media firm, operates a voice-centric social networking and entertainment platform in the Middle East and North Africa. Its software provides group chatting and gaming services. 

Performance

The firm, which is valued at a little over $540m, posted net income of $82.6m in 2021 compared with net income of US$3.2m in 2020. The firm grew revenues and earnings year-on-year while producing cash flow growth and pressing forward with its expansion plans.

Data from the last reporting period demonstrates positive year-on-year growth despite the falling share price. Revenue was $273.1m in 2021, representing an increase of 102.4% from 2020. Meanwhile, net income was $82.6m and net margin was 30.2%. That compares with net income of $3.2m in 2020.

Another important metric for the company is average monthly active user (MAUs). These users increased by 71% to 28.1m in the fourth quarter of 2021 from 16.4m in Q4 2020. However, and perhaps more importantly, there was significant growth in the number of paying users, which increased from 5.2m in the fourth quarter of 2020 to 8.4m in the fourth quarter. The main growth driver was the platform’s Ludo game offering. There was a 52% increase in the number of Yalla Ludo’s paying players – from 4.0m to 6.2m over the course of the year.

However, it’s worth noting that Q4 2021 saw a fall in both revenue and income. Although the difference between Q3 and Q4 revenue was only $4m, it was certainly not a positive development.

Headwinds

A number of risks have been weighing on the company’s share price. First among them is declining revenue in the final quarter of 2021. It may be the case that the pandemic and the accompanying lockdowns contributed to its growth. But outside of the pandemic, such growth may be unsustainable as normal life returns. Another point is that higher interest rates and inflation can call a halt to growth plans as the cost of borrowing increases. Although it’s worth noting that Yalla has sufficient cash reserves for growth.

There’s also a matter of competition. Yalla has found something of a niche so far, but social media giants could well move into this space.

Should I buy?

For me, the Yalla share price has fallen far enough. And with a price-to-earnings ratio below 10, it’s starting to look rather cheap. Management also has ambitious plans for growth. The firm intends to start delivering a “more immersive” social experience area, with users seeking “metaverse”-type interactions with each other. Furthermore, Yalla is expanding into the South American market with its Parchis app.

I’m looking to add Yalla to my portfolio.