Why HUYA Stock Was Plummeting Today

What happened

Shares of Chinese video game platform HUYA (HUYA +2.97%) were falling on Thursday after the company reported earnings for the first quarter of 2020. As of 12:45 p.m. EDT, the stock was down 13% for the day, contributing to the stock's 15% loss over the past year.

Investors aren't likely bemoaning the Q1 earnings report, as HUYA posted across-the-board growth. It's more likely that investors fear what could happen to the stock now that the U.S. Senate has passed the Holding Foreign Companies Accountable Act with unanimous consent. 

HUYA data by YCharts

So what

The Holding Foreign Companies Accountable Act passed yesterday and will now need approval from the House of Representatives to move forward. However, the bill could gain traction considering its bipartisan Senate support. And President Trump has also expressed support.

If passed, the bill will require public Chinese companies to submit third-party financial audits to the SEC. Failure to do so would result in their stocks being delisted from U.S. exchanges. The possibility has created an uncertain situation for HUYA shareholders, since it's not clear how the company would respond.

This overshadows what was otherwise a strong quarter for HUYA. Monthly average users (MAU) for mobile increased 39% year over year to 75 million, and MAU for Huya Live grew 22% to 151 million. More users, higher spending, and increased advertising resulted in quarterly revenue of $341 million -- good for 48% year-over-year growth.

Image source: Getty Images.

Now what

I suspect that until investors gain more clarity on Chinese companies, shares of this video game stock will struggle to rise. But supposing the bill passes, HUYA obliges with new regulations, and everything checks out, the stock could have an attractive valuation today. Consider that net income attributable to HUYA grew 170% to $24 million in Q1. The company now has $1.5 billion in cash, cash equivalents, and short-term investments compared to a market capitalization of only $3.7 billion. That looks cheap, especially with the kind of growth HUYA is posting.